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Theory  and  Practice 


OF 


International  Commerce 


BY 


ARCHIBALD  J.  WOLFE 


431 17 


NEW  YORK  AND  LONDON 
INTEENATIONAL  BOOK  PUBLISHING  COMPANY 

1919. 


Copyright,  1919, 

By 

International  Book  Publishing  Company. 


HF 
\007 

W93 
n 

FOREWORD. 

"Theory  and  Practice  of  International  Commerce' 
is  intended  as  a  scientific  outline  of  the  merchandizing  principles 
in  export  and  import.  In  its  theoretical  portion  it  aims  to  suppl) 
the  teachers  and  the  students  in  American  colleges  with  a  logic- 
ally built-up  course  of  instruction,  and  the  business  world  al 
large  with  an  exposition  of  those  economic  principles  which  are 
responsible  for  the  development  of  modern  methods  in  export- 
ing and  importing  for  the  evolution  of  the  present-day  sales  ma- 
chinery in  international  commerce,  and  for  the  establishment  of 
that  vast  body  of  unwritten  commercial  law  known  as  "com- 
mercial usage." 

In  Part  II  ("Problems  of  Modern  American  Export  Prac- 
m  tice")  the  author  does  not  attempt  to  deal  with  elementary  les- 
sons and  hints  on  the  subject  of  export  routine,  qualifications  of 
salesmen,  packing  methods,  etc.  It  may  be  assumed  that  all 
practical  exporters  and  importers  are  familiar  with  such  A.B.C. 
matters.  An  attempt  to  cover  the  entire  range  of  these  topics  in 
one  volume  is  doomed  to  superficiality  in  the  very  elements  in 
which  their  discussions  would  be  serviceable :  their  detailed 
treatment,  with  illustrations,  is  possible  only  in  intense  spe- 
cialized study  units.  The  present  volume  adopts  the  plan  of  a 
detailed  analysis  of  a  few  selected  practical  problems  in  which 
a  changed  outlook,  due  to  the  developments  of  recent  years,  calls 
for  a  thorough  presentation.  These  problems  include  foreign 
credits  and  the  evolution  of  modern  banking  facilities;  com- 
mercial laws  and  regulations  affecting  incorporations  abroad; 
the  value  and  the  correct  use  of  sources  of  information  at  home 
and  abroad,  and  the  proper  sphere  and  development  of  official 
and  associational  trade  promotion ;  finally  the  rational  methods 
of  modern  publicity.  All  the  other  practical  matters  bearing  on 
international  commerce,  by  the  way,  are  incidentally  referred  to 
throughout  the  volume  insofar  they  affect  the  rights  and  obliga- 
tions of  the  vendor  and  the  buyer  as  parties  to  international  sales 
contracts. 


\* 


To  build  up  a  scientific  presentation  of  the  principles  of  in- 
ternational commerce  requires  the  sifting  of  a  tremendous  mass 
of  fact  material,  some  of  which  is  notoriously  unamenable  to 
grouping  and  analyzation.  In  the  mass  of  available  fact  material 
in  international  commerce  stands  out  a  central  technical  process 
known  as  the  "sale."  This  forms  the  center  of  our  consideration, 
leading  us  to  a  systematic  study  of  conditions  antecedent  and 
subsequent  to  the  conclusion  of  the  sales  contract,  including  the 
historic  development  of  the  present  day  commercial  organization 
in  the  country  of  export  and  its  counterpart  in  the  country  of 
import;  the  rights  and  obligations  arising  from  the  conclusion 
of  the  sales  contract;   the  technique  of  pricing,  etc. 

The  activities  of  exporters  and  of  importers  at  home  and 
overseas  are  closely  analyzed;  the  conflicting  interests  of  the 
exporters  and  of  the  importers,  of  producers  and  of  distributors, 
are  carefully  reviewed  by  markets.  An  attempt  is  made  to  classify 
importers  and  exporters  and  to  make  clear  distinctions  between 
types.  A  careful  consideration  is  given  to  commercial  usage  in 
the  matters  of  quality,  of  quantity,  of  style  and  make-up,  to  the 
problems  of  time  and  place  of  contract  performance,  of  pricing, 
discounting,  terms  of  payment,  form  of  contracts,  etc. 

In  considering  the  principles  underlying  export  trading,  the 
present  volume  follows  the  shipment  of  manufactured  products 
from  the  United  States  and  the  industrial  countries  of  Europe  to 
those  essentially  importing  countries  constituting  what  is  known 
as  the  "export  field."  The  analysis  of  the  commercial  organ- 
ization in  the  exporting  country  leads  us  to  a  review  of  the  con- 
nections between  the  exporting  and  the  importing  country,  as 
initiated  either  by  the  vendor  or  by  the  buyer,  and  concludes 
with  the  study  of  the  distributing  organization  in  the  importing 
country. 

In  considering  the  import  trade,  it  takes  up  the  shipment  of 
oversea  products  from  the  non-industrial  countries  such  as  Latin- 
America,  the  Far  East,  African  colonies,  etc.  to  United  States 
and  the  industrial  countries  of  Europe,  pursuing  the  same  course 
as  outlined  for  the  export  trade,  but  with  the  objectives  reversed. 

ARCHIBALD  J.  WOLFE. 

New  York,  July  1919. 


CONTENTS 

Part  I. 

THE  THEORY  of  INTERNATIONAL  COMMERCE 


CHAPTER  I.   (pp.  13—22) 

Pago 
International  Commerce  as  an  Economic  Science. 

1.  The   Meaning   of   Commerce 13 

2.  The  Classification  of  Commerce 15 

3.  International  Commerce  in  its  Relation  to  Economics 19 


CHAPTER  II.  (pp.  23—53) 

Basic  Factors  in  the   Development   of   International   Commerce. 

1.  International  Merchants  as  a  Factor  in  the  Development  of 
International  Commerce  23 

2.  Competitiveness  as  a  Factor  in  the  Development  of  Inter- 
national  Commerce    32 

3.  Traffic  Conditions  as  a  Factor  in  the  Development  of  Inter- 
national  Commerce    35 

4.  Governmental  Influences  Affecting  the   Exchange  of  Goods 
between  Countries    •    ' 

6.    Commercial  Laws  and  Usages  as  Factors  in  International 
Commerce 


50 


7.    Official  and  Private  Promotion  of  International  Commerce    51 


CHAPTER  III.    (pp.  54—63) 
//. 
General  Commercial  Organization.  / 

1.  Merchants  as  Middlemen   54 :   ^s 

2.  Producers  and  Consumers   56,; 

3.  Merchants   Trading   for   Own   Account 58 

4.  Commission   Merchants   and   Agents    60 

5.  Selling   Agents   and   Representatives 61 

6.  Brokers  and  Auctioneers 63 


G  CONTENTS 

CHAPTER  IV.  (pp.  64—90) 

Page 
The  Organization  of  International  Commerce. 

I.    The   Organization   of  the  Export   Trade. 

A.  The  Organization  in  the  Exporting  Country. 

1.  Exporters,  Commission  Merchants  and  Agents 65 

2.  Advantages  and  Disadvantages  of  Indirect  and 
Direct  Exporting  83 

3.  The  Growth  and  Development  of  Export  Centers....  89 

CHAPTER  V.   (pp.  91—99) 

The  Organization  of  International  Commerce  (cont.). 

I.    The  Organization  of  the  Export  Trade  (continued). 

B.  The    Commercial    Connections    between    the    Exporting 
and  the  Importing  Country. 

1.  Connections  Opened  through  the  Initiative  of  the 
Buyer 91 

2.  Connections  Opened  through  the  Initiative  of  the 
Seller    93 

CHAPTER  VI.  (pp.  100—119) 

The  Organization  of  International  Commerce   (cont.)^ 

I.    The  Organization  of  the  Export  Trade  (concluded). 
C.     The   organization  in  the  Importing  Country. 

1.  Oversea   Importers    Classified    100 

2.  Oversea  Consumers  as  Direct  Customers  of  Export- 
ers and  Manufacturers  101 

3.  Oversea  Wholesalers,  Jobbers  and  Retailers  as  Direct 
Customers  of  Exporters  and  Manufacturers  and  as 
Customers  of  Oversea  Importers  Properly  Speaking  103 

4.  Analysis  of  the  Activities  of  Oversea  Importers 107 

5.  Advantages  and  Disadvantages  of  Dealing  with  Over- 
sea Importers  in  the  Strict  Sense  of  the  Term,  from 
the  Point  of  View  of  Exporters  and  of  Exporting 
Manufacturers    114 

6.  The  Growth  and  Development  of  Import  Trading 
Centers   Overseas   116 

CHAPTER  VII.  (pp.  120—133) 

The  Organization  of  International  Commerce   (cont.). 

II.    The  Organization  of  Import  Trade  in  Oversea  Products. 
A.     The  Organization  in  the  Exporting  Country. 

1.  General    Remarks    120 

2.  The  Participation  of  Oversea  Producers  in  the  Ex- 
port of  Oversea  Products  to  Industrial  Countries..  121 

3.  Oversea  Exporters  Shipping  to  Europe  and  United 
States     123 

4.  Middlemen  Intervening  between  Oversea  Producers 
and  Oversea  Exporters  129 

5.  The  Growth  and  Development  of  Oversea  Export 
Centers  in  the  Shipment  of  Oversea  Products  to 
Europe  and  America  131 


CONTENTS  7 

CHAPTER  VIII.   (pp.  134—151) 

Fag« 
The  Organization  of  International  Commerce   (cont.). 

H.     The    Organization    of    Import    Trade    in    Oversea    Products 
(concluded). 

B.  The  Commercial  Connections  between  Exporting  Coun- 
tries Overseas  and  Industrial  Countries  of  Europe  and 
America  in  the  Shipment  of  Oversea  Products. 

1.  Connections  Initiated   by   the   Buyers 134 

2.  Connections   Initiated   by   the   Seller 135 

C.  The  Organization  in  the  Importing  Country  in  the  Im- 
port of  Oversea  Products  to  Industrial  Countries  of 
Europe  and  to  United  States. 

1.  The  Role   of  the   Importers   of   Various   Classes 138 

2.  The  Growth  and  Development  of  Import  Centers  in 
Europe  and  in  America 145 

CHAPTER  IX.   (pp.  152—170) 

The  Organization  of  International  Commerce   (concl.). 
III.     The  Organization  of  Public  Sales. 

1.  Markets,  Fairs  and  Expositions 152 

2.  Auctions    156 

3.  Dutch   Auctions    163 

4.  Competitive   Tenders    165 

5.  Exchanges 168 

CHAPTER  X.   (pp.  171—200) 

The  Sales  Contract  in  International   Commerce. 

1.  The  Form   of  Contract 171 

2.  The  Sales  Contract  and  Commercial  Usage 175 

3.  Contract  Obligations  Relating  to  the  Nature  and  the  Quali- 
ty of   Goods   177 

4.  Contract  Obligations  Relating  to  the  Quantity  of  Goods 190 

5.  Contract  Obligations  Relating  to   Packing 194 

6.  Contract  Obligations  Relating  to  Style  and  Make-Up .199 

CHAPTER  XL   (pp.  201—213) 

The  Sales  Contract  in  International  Commerce  (cont.). 

7.  Contract  Performance. 

A.  The   Time    of   Performance 201 

B.  The  Place   of  Performance 21C 

C.  The  Delivery  212 

CHAPTER  XII.  (pp.  214—253) 

The  Sales  Contract  in   International  Commerce  (cont.). 

8.  The  Price  and  the  Technique  of  Price  Calculation. 

A.  The  Meaning  of  Price 214 

B.  The    Quotation 

a)     The    Meaning    of    Quotation 21(i 


8  CONTENTS 

Page 

b)  The   Price   Basis   and   Allowances   Relating  to   the 
Quantity  and  the  Quality  of  the  Goods 217 

c)  The  Price   Denomination    222 

d)  The  Time  Basis  of  Price  Calculation 226 

e)  Discounts  and  Rebates  228 

f)  The   Costs  of   Transportation,   Insurance   and  Inci- 
dentals as  Elements  of  the  Quotation 231 

g)  Cash  Terms  237 

h)     Credit   Terms   240 

9.     Special  Contract  Clauses. 

a)  Provisions  for  the  Adjustment  of  Disputes 247 

b)  The  Annulment  and  Cancellation  of  Contracts 250 

c)  Miscellaneous  Stipulations  Regarding  the  Perform- 
ance of  Contracts  252 

CHAPTER  XIII.   (pp.  254—280) 

The  Sales  Contract  in  International  Commerce   (concl.). 
Special  Types  of  International  Sales  Contracts. 

A.  The  Indent  Business  with  Asiatic  Customers. 

a)  General   Remarks   254 

b)  The  Indian  Indent  259 

c)  Far  Eastern  Indents  264 

B.  Contracts  in  the  Import   of  Oversea  Produce 266 

C.  Contracts  of  the  Exporter  with  the  Manufacturer 276 


Part  II. 

PROBLEMS  of  MODERN  AMERICAN 
EXPORT  PRACTICE 


CHAPTER  XIV.   (pp.  283—348) 

The  Problem  of  Foreign   Credits. 

General  Statement   28S 

A.     The  German  Methods  of  Financing  Foreign  Shipments  be- 
fore the  War. 

1.  The  historic  development  of  German  export  methods....  287 

2.  The  technique  of   financing  foreign   shipments  in  Ger- 

3.  German  banks  and  the  financing  of  foreign  shipments  32a 
4     The  advantages  and  the  defects  of  the  German  meth- 

ods   of    financing   foreign    shipments 3^8 

B     The  British  Methods  of  Financing  Foreign  Shipments 334 


CONTENTS  9 

CHAPTER  XV.   (pp.  349—377) 

Pag* 
The  Problem  of  Foreign  Credits  (concl.). 

C.  The  Foreign  Credit  Problem  in  America  before  the  Enact- 

ment of  the  Federal  Reserve  Act. 

1.  The  American  exporter  and  the  problem  of  foreign 
credits  before   1914  3!9 

2.  Credit  information   355 

3.  The  American  banks  and  their  service  to  exporters  be- 
fore the  enactment  of  the  Federal  Reserve  Act 367 

CHAPTER  XVI.   (pp.  378—410) 

The  Problem  of  Foreign  Credits   (cont.). 

D.  Financing  Foreign  Shipments  in  America  Since  the  Enact- 

ment of  the  Federal  Reserve  Act. 

1.  The  Federal  Reserve  System  as  affecting  the  financing 

of  foreign  shipments  378 

Acceptances   38-1 

The   relations  of  the  Federal  Reserve  Board   with  for- 
eign banks  392 

Banks  organized  for  transacting  foreign   business 394 

2.  The  American  banks  and  their  service  to  exporters 
since  the  enactment  of  the  Federal  Reserve  Act 402 

CHAPTER  XVII.   (pp.  411—451) 

The  Problem  of  Foreign  Credits  (concl.). 

E.  The  Use  of  Credit  Instruments  in  American  Practice. 

1.  Drafts  and  credits   411 

2.  Specimens   of   drafts   and   credits 416 

3.  Bank  acceptance  practice  „..  425 

4.  Bank  acceptances  and  the  discount  market 438 

CHAPTER  XVIII.   (pp.  453—494) 

American    Commercial    Enterprises    Domiciled    Abroad. 

1.  Foreign  branch  establishments  of  American  firms  and 
the  incorporation  of  subsidiary  stock  companies  under 
foreign    Laws    453 

2.  Foreign  trading  and  company  laws 459 

3.  Licenses  for  commercial  travelers 489 

4.  Adjustment  of  disputes  and  recovery  of  debts _ 490 

CHAPTER  XIX.  (pp.  495—522) 

Foreign  Trade  Promotion. 

A.    Official  Trade  Promotion. 

1.  General    Remarks    495 

2.  The  Activities  of  the  U.  S.  Department  of  Commerce. ...497 

3.  The  U.  S.  Department  of  State  and  Foreign  Trade  Pro- 
motion       500 

4.  The  War  Trade  Board   505 


io  Contents 

Pago 

B.  Foreign  Trade  Promotion  by  Associations  of  Nation-Wide 

Scope 

1.  The  National  Foreign  Trade  Council 507 

2.  The  Chamber  of  Commerce  of  U.  S.  A 508 

3.  Other   National   Organizations   509 

C.  Foreign  Trade  Promotion  by  Local  Organizations 515 

CHAPTER  XX.  (pp.  523—535) 

Export  Publicity. 

a)  General   Remarks   523 

b)  Publicity  through  American  Export  Periodicals 527 

c)  Catalogs  and  Circularization   530 

d)  Publicity    through     Foreign     Newspapers     and     Trade 
Journals   532 

BIBLIOGRAPHY    537 

INDEX   541 


PART   I. 

THE  THEORY  OF  INTERNATIONAL 
COMMERCE. 


CHAPTER  I. 

International  Commerce  as  an  Economic  Science. 
i.     The  Meaning  of  Commerce. 

The  value  of  an  article  of  human  consumption  is  deter- 
mined by  two  factors:  its  capacity  of  satisfying  a  human  need, 
and  the  extent  of  the  need  which  it  satisfies. 

The  average  extent  of  the  need  which  a  class  of  articles 
serves  to  satisfy  determines  a  general  valuation  of  that  class  of 
articles,  and  hence  we  have  a  differentiation  in  values  by  classes 
or  kinds  of  articles. 

But  the  valuation  of  a  specific  article  in  a  concrete  in- 
stance is  determined  by  the  extent  of  need  for  such  articles  which 
is  no  longer  covered  by  articles  of  the  same  class  on  hand  and 
to  satisfy  which  the  article  is  desired. 

This  is  the  so-called  "final  degree  of  utility." 

The  final  degree  of  utility  is  naturally  subject  to  variations 
in  accordance  with  the  varying  needs  of  individuals,  as  well  as 
with  the  varying  average  needs  of  the  population  in  different 
localities  and  at  different  seasons.  As  a  consequence  of  this 
phenomenon  the  same  articles  vary  in  their  value  to  different 
people,  in  different  places  and  at  different  times. 

This  variation  of  the  value  of  articles,  particularly  if  meas- 
ured by  the  value  standard  of  other  articles,  is  the  basis  of  com- 
merce. Articles  of  human  consumption  forming  the  object  of 
commerce  are  generally  termed  goods,  merchandise  and  com- 
modities. 

Commerce,  or  trade,  in  its  wider  aspect,  is  an  exchange  of 
goods,  or  of  right  to  goods,  for  other  objects  which  are  more  de- 
sired. 

The  division  of  labor  as  the  effect  of  human  progress  in  pro- 
duction, and  the  principle  of  individual  property  rights  render 
commerce  as  the  sole  legitimate  means  by  which  an  individual 


14  INTERNATIONAL  COMMERCE 

can  procure  goods  other  than  those  produced  by  himself  or  re- 
ceived as  a  remuneration  for  services  performed. 

We  arrive  thus  at  two  important  factors  in  commerce,  the 
producer,  who  either  by  his  labor  gains  from  natural  sources,  or 
by  his  skill  fashions  from  natural  materials  those  goods  which 
are  useful  in  satisfying  human  needs,  and  the  consumer,  whose 
need  is  satisfied,  and  who  in  exchange  offers  to  the  producer 
other  goods,  or  right  to  other  goods,  which  the  producer  desires 
more  than  his  own  goods  or  products. 

The  development  of  the  economic  activities  of  mankind  re- 
sulted in  an  extension  of  these  exchange  operations  until  pro- 
ducers and  consumers  became  separated  by  great  distances; 
added  to  this  came  the  necessity  of  providing  possibilities  for 
effecting  these  exchanges  at  specified  times  in  the  future,  and 
since  frequently  neither  producers  nor  consumers  could  sat- 
isfactorily attend  to  these  transactions,  the  introduction  of  an 
important  third  economic  factor  followed  as  a  necessity:  this 
factor  is  the  trader,  or  merchant.  And  this  brings  us  to  the  con- 
sideration of  commerce  in  its  stricter  sense. 

Commerce,  in  the  stricter  sense  of  the  term,  is  an  economic 
activity  consisting  of  the  purchase  and  of  the  sale  of  goods 
(without  undertaking  any  changes  on  same,)  or  of  existing  rights 
to  goods,  through  which  the  final  exchange  of  goods  between 
producer  and  consumer  is  effected,  but  which  has  for  its  im- 
mediate aim  the  transfer  of  exchange  objects  from  the  posses- 
sion of  those  who  value  them  less  highly  in  relation  to  the  ex- 
change medium  into  the  possession  of  those  who  value  them 
more  highly  in  relation  to  the  exchange  medium,  the  purpose  of 
this  activity  being  to  retain  a  portion  of  this  value  difference, 
called  profit,  as  remuneration. 

The  change  of  ownership  effected  by  commerce  creates 
values  by  adding  to  the  value  of  goods  exchanged.  The  trader, 
or  merchant,  is  reimbursed  for  his  activity  by  the  difference  be- 
tween his  expenses  and  his  income,  which  forms  a  portion  of 
the  increased  value  of  the  goods. 

The  activity  of  the  trader  and  merchant  benefits  both  groups 
of  economic  factors  between  which  he  intervenes :  his  purchases 
at  the  point  of  production  tend  to  increase  the  producer's  price; 
his  sales  offers  at  the  point  of  sale  tend  to  lower  the  price  paid 


COMMERCE    CLASSIFIED  15 

by  the  consumer;  moreover  his  activity  tends  to  diminish  the 
fluctuation  in  the  valuation  of  goods  at  different  times  and  in 
different  places. 

The  trader  or  merchant  is  not  a  producer;  in  accordance 
with  the  strict  definition  of  commerce,  he  may 'not  effect  material 
changes  in  the  composition  of  the  gods.  He  may  effect  changes 
in  the  packing  or  in  the  assortment;  but  if  he  effects  improve- 
ments materially  altering  the  character  of  the  goods,  he  com- 
bines the  capacity  of  producer  with  his  capacity  of  merchant  or 
trader. 

When  we  speak  of  a  country's  international  commerce,  how- 
ever, we  depart  from  this  strict  and  narrow  definition  of  com- 
merce and  include  not  only  goods  bought  and  sold  between  mer- 
chants, or  traders  on  the  one  hand,  and  traders  and  consumers 
on  the  other  hand,  but  also  transactions  between  producers  on 
the  one  hand  and  consumers  on  the  other,  and  the  modern  tend- 
ency has  been  towards  a  combination  of  the  functions  of  the 
merchant  with  the  functions  of  the  producer. 

2.     The  Classification  of  Commerce. 

Commerce  may  be  divided  into  three  classes,  in  accordance 
with  the  objects  bought  and  sold:  goods,  merchandise  and  com- 
modities; money,  bullion  and  financial  instruments;  and  finally 
real  estate  and  immovable  property.  The  last-named  variety  of 
commerce  enters  but  distantly  into  the  domain  of  international 
commerce;  the  commerce  in  money,  bullion  and  credit  instru- 
ments, while  in  some  of  its  aspects  most  intimately  connected 
with  international  commerce,  is  a  specific  subject,  which  must  be 
treated  under  the  caption  of  Banks  and  Banking.  Commerce,  as 
generally  understood,  deals  with  goods,  merchandise  and  com- 
modities. 

Commerce  is  also  divided,  in  accordance  with  the  character 
and  the  volume  of  transactions,  into  wholesale  and  retail  com- 
merce. Wholesale  commerce  may  be  carried  on  between  two 
merchants,  or  between  a  merchant  and  a  producer,  or  between 
two  producers,  or  between  a  producer  and  a  large  consumer; 
retail  commerce  is  carried  on  principally  between  a  merchant 


16  INTERNATIONAL  COMMERCE 

and  a  consumer,  less  frequently  between  a  producer  and  a  con- 
sumer. 

Commerce  may  be  carried  on  in  permanent  establishments 
or  be  itinerant  in  character.  The  examples  of  the  latter  are  the 
peddler ;  the  carayan  trade  in  certain  undeveloped  localities ; 
speculative  despatches  of  miscellaneous  cargoes  on  chartered 
ships  to  new  and  undeveloped  markets,  such  as  formed  the  start- 
ing point  of  many  a  flourishing  export  enterprise;  fairs  and 
expositions.  The  permanent  establishment  may  be  a  store,  either 
single  or  a  unit  in  a  chain  of  stores ;  a  wholesale  establishment 
with  or  without  a  warehouse;  an  office  carrying  no  stock  of 
goods,  though  perhaps  a  collection  of  samples,  and  only  inciden- 
tally attending  to  the  actual  shipment  of  goods. 

Commerce  again  may  be  divided  into  local  and  out-of-town 
commerce;  if  the  entire  transaction  originates  and  is  concluded 
in  the  community  where  the  trader  is  domiciled  it  is  local  com- 
merce; many  concerns  doing  an  out-of-town  and  even  an  inter- 
national business  maintain  a  "city  department"  to  attend  to  local 
commerce.  Local  commerce  may  be  done  with  a  buyer  from 
another  community  if  he  calls  personally  on  the  trader  and  ac- 
cepts his  purchase  on  the  spot. 

Finally  commerce  is  divided  into  domestic  commerce  and 
international  or  foreign  commerce. 

Domestic  commerce  is  based  on  the  purchase  and  sale  of 
goods,  merchandise  and  commodities  between  parties  located  in 
one  country,  though  the  goods  may  be  eventually  shipped  by  the 
purchaser  to  another  country.  International  or  foreign  com- 
merce is  carried  on  between  buyers  and  sellers  located  in  two 
different  countries. 

International  commerce  is  divided  into  export  and  import 
commerce. 

The  export  of  goods  is  an  international  transaction  involv- 
ing the  shipment  of  goods  from  the  home  country  into  another; 
the  import  of  goods  is  the  reverse  of  this  transaction.  Both 
the  export  and  the  import  commerce  are  based  on  these  trans- 
actions, without  necessarily  fully  coinciding  with  them.  A  con- 
cern sending  a  stock  of  goods  to  its  own  branch  abroad  exports 
these  goods,  but  the  transaction   is  not   strictly   export   trade. 


COMMERCE    CLASSIFIED  17 

And  a  similar  condition  may  prevail  in  the  import  of  goods. 

In  addition  to  the  export  and  the  import  commerce  there 
exists  also  an  intermediate  commerce,  where  a  concern  located 
in  one  country  may  effect  an  international  business  transaction 
by  sending  goods  from  a  second  country  to  a  third,  in  which 
case  the  goods  need  not  necessarily  pass  en  route  through  the 
country  where  the  seller  is  domiciled. 

A  still  further  variety  of  international  commerce  is  the 
transit  commerce.  Here  a  shipment  passes  from  one  country 
through  another  into  a  third  country.  Goods  shipped  from  Can- 
ada to  Mexico  by  way  of  United  States  are  shipped  in  transit. 
Here  the  commerce  of  the  United  States-  is  only  concerned 
through  common  carriers,  freight  agents,  etc.  Transit  commerce 
consists  of  an  import  and  an  export  transaction,  but  only  con- 
structively so,  unless  the  goods  are  accepted  in  the  transit  coun- 
try and  shipped  out  again,  in  which  case  the  transaction  termin- 
ates with  re-export. 

From  this  point  of  view  export  trade  may  be  direct  or  in- 
direct. In  direct  export  trade  the  shipper  sends  his  goods  direct 
to  the  country  of  consumption,  or  at  least  to  the  port  of  entry 
nearest  to  it;  export  commerce  is  termed  indirect,  if  the  goods 
are  shipped  to  one  country  and  thence  re-exported  to  the  coun- 
try of  ultimate  destination.  This  was  formerly  the  practice  of 
many  American  shippers.  American  goods  were  shipped,  for 
instance,  to  Hamburg,  and  thence  re-exported  to  Russia,  or  they 
were  shipped  to  Liverpool,  and  thence  re-exported  to  West 
Africa. 

The  same  condition  is  duplicated  in  the  import  trade.  Goods 
shipped  to  the  purchasing  country  direct  from  the  country  of 
origin  are  an  example  of  direct  import ;  goods  shipped  to  an- 
other country  and  thence  to  the  purchasing  country  illustrate  in- 
direct import.  Sumatra  tobacco  shipped  to  United  States  from 
Holland  is  an  example  of  indirect  import. 

Both  the  export  and  the  import  commerce  are  termed  direct 
or  indirect  also  in  a  sense  other  than  described  above.  A  third 
party  may  intervene  between  the  actual  seller  and  the  actual 
buyer,  generally  in  the  shape  of  a  commission  agent,  and  export 
commerce  carried  on  through  his  mediation  is  termed  indirect, 
as  distinct  from  the  direct  export  commerce  without  such  inter- 


18  INTEKNATIONAL  COMMEBCE 

vention.  Similarly  a  producer  selling  his  products  to  the  buyer 
in  a  foreign  country  without  the  intervention  of  a  middleman 
is  doing  a  direct  export  business,  but  when  he  sells  through  an 
exporter  or  through  an  agent,  who  is  not  his  own  or  the  buyer's 
immediate  representative,  he  is  doing  an  indirect  export  business. 
The  same  condition  prevails  in  the  import  trade. 

The  functions  of  the  commission  agents  and  other  middle- 
men in  the  export  and  the  import  commerce  will  be  described  in 
detail  under  the  head  of  "Organization." 

Commerce  is  also  divided  into  oversea  commerce,  coastwise 
commerce  and  continental  or  overland  commerce.  Goods  ship- 
ped from  New  York  to  Chile  by  ocean-going  vessels  illustrate 
oversea  commerce;  a  shipment  along  the  coast  from  Portland, 
Maine,  into  Canada  is  coastwise  commerce ;  a  shipment  overland 
from  San  Antonio  to  Mexico  is  continental  commerce. 

In  ordinary  commerce  goods  are  sold  for  a  money  consider- 
ation. Money  in  some  of  its  varieties — cash,  cashable  drafts, 
or  credit,  forms  the  purchase  price  of  the  goods.  The  vendor 
parts  with  the  goods  either  against  current  funds  or  "cash  at 
some  future  time."  Two  concurrent  transactions  may  render 
an  actual  transfer  of  funds  superfluous,  and  yet  both  may  oe 
based  on  money  considerations.  A  New  Yorker  shipper  may  be 
sending  hardware  to  the  same  house  in  Rio  de  Janeiro  from 
which  he  receives  coffee  shipments.  Contrasting  with  such  trans- 
actions is  the  barter  commerce  which  still  prevails  in  certain 
undeveloped  markets.  But  even  here,  instead  of  direct  barter 
of  foreign  products  against  native  produce,  a  species  of  com- 
modity particularly  esteemed  by  natives  may  become  a  favorite 
exchange  medium  and  assume  the  character  of  money. 

Finally  commerce  may  be  considered  from  the  point  of  view 
of  activity  and  passivity.  A  country  is  doing  an  active  export 
business  if  its  merchants  look  up  foreign  markets,  develop  trade 
in  foreign  localities  through  traveling  salesmen,  correspondence, 
publicity,  and  employ  home  capital  in  their  foreign  trade  trans- 
actions. Selling  its  products  to  foreigners  who  come  from  abroad 
to  buy,  or  through  the  mediation  of  merchants  abroad,  a  coun- 
try is  said  to  be  doing  a  passive  export  business.  The  distinc- 
tion, however,  does  not  admit  of  sharp  demarcation. 


COMMERCE  AND  ECONOMICS  19 

3.    International  Commerce  in  its  Relation  to  Economics. 

In  speaking  of  international  commerce,  it  is  the  commerce 
in  goods,  merchandise  and  commodities  that  is  generally  under- 
stood. All  these  three  generic  terms,  often  used  interchange- 
ably, though  not  strictly  coinciding,  are  here  taken  to  comprise 
the  entire  range  of  products  which  form  the  materials  of  com- 
merce. The  allied  and  largely  intertwining  fields  of  banking, 
transportation,  insurance  and  policies,  can  be  treated  only  pass- 
ingly in  an  outline  of  the  principles  of  international  commerce 
from  the  merchandizing  point  of  view.  These  auxiliary  subjects 
can  receive  full  consideration  only  in  special  intense  study  units. 
Incorporated  in  a  book  dealing  with  the  theory  of  international 
commerce,  their  exhaustive  treatment  would  defeat  the  object 
of  furnishing  a  clear  outline  of  principles  underlying  the  con- 
clusion of  an  international  sales  contract,  with  it^  antecedents 
and  consequences,  and  instead  of  a  unified  science  would  con- 
front the  student  with  an  encyclopedic  complex  oi  sciences. 

In  a  scientific  presentation  of  international  commerce  from 
the  point  of  view  of  merchandizing  we  may  treat  commerce  as 
a  special  subject  rather  than  as  a  branch  of  national  economics. 
We  need  not  consider  commerce  as  a  national  economic  func- 
tion, but  as  the  activity  of  private  economic  units,  by  bringing 
out  scientifically  the  conditions  under  which  the  various  processes 
of  international  commerce  are  carried  on,  and  their  effects  both 
upon  commerce  itself  and  upon  those  engaged  in  commerce. 

The  center  of  the  consideration  must  therefore  be  the  con- 
clusion of  the  sales  contract  as  the  result  of  which  the  exchange 
of  goods  takes  place.  We  may  consider  the  sales  contract  as  a 
technical  process  the  details  of  which  must  be  scientifically  ex- 
amined. Reaching  backward  to  its  antecedents  we  must  examine 
into  the  conditions  which  have  brought  it  about  or  affected  it, 
though  we  may  not  go  in  that  direction  beyond  the  point  where 
commercial  activity  has  commenced,  lest  delving  too  deeply  we 
stray  beyond  our  subject  into  the  domain  of  national  economics. 

In  the  other  direction,  examining  into  the  effects  of  the 
sales  contracts,  we  must  investigate  the  conditions  under  which 
the  actual  transfer  of  goods  takes  place,  we  must  trace  the  de- 
velopment arising  therefrom  as  affecting  the  individual  trades- 


20  INTERNATIONAL  COMMERCE 

man,  and  thus  the  entire  business  world  of  the  nation,  and 
finally  the  world  trade. 

At  the  same  time  a  scientific  presentation  of  the  merchan- 
dizing principles  of  international  commerce  must  on  the  whole 
follow  the  methods  of  economic  sciences.  It  must  gather  a 
maximum  of  fact  material.  Here  we  are  confronted  with  un- 
usual difficulties  in  the  way  of  scientific  treatment,  for  we  prin- 
cipally depend  for  fact  material  upon  a  very  precarious  source 
of  information,  namely  upon  the  traders  themselves.  The  busi- 
ness world  is  notoriously  averse  to  disclosing  business  secrets; 
the  American  business  man  has  outgrown  this  tendency  to  a 
greater  extent  than  the  traders  of  other  countries,  but  the  tend- 
ency still  clings  to  the  foreign  departments  even  of  many  Ameri- 
can enterprises.  "Clinical"  material  is  very  difficult  to  obtain, 
and  where  it  is  offered  more  or  less  freely,  it  is  frequently  un- 
intentionally colored  by  personal  prejudices,  interests,  excep- 
tional or  accidental  experiences,  and  therefore  such  material 
must  be  carefully  weighed,  sifted  and  examined. 

By  analytical  grouping  we  can  then  arrive  at  the  typical  in 
the  facts  and  the  processes,  and  determining  their  substance, 
their  causes  and  effects,  pursue  their  development  possibilities. 

The  consideration  of  International  Commerce  as  a  science 
may  be  divided  under  two  heads : 

I.  Theory  and  general  merchandizing  principles,  treating 
the  fact  material  as  suggested  above,  principally  by  the  inductive 
process,  and  presenting  the  knowledge  thus  gained  of  the  sub- 
stance of  these  facts,  their  causal  connection  and  their  general 
development  tendencies  in  a  systematized  and  orderly  manner. 

This  may  be  subdivided  under  the  following  captions : 

a)  The  basic  conditions  of  International  Commerce. 

b)  The  organization  of  International  Commerce. 

c)  The  conclusion  of  contracts  in  International  Com- 

merce. 

d)  The  routine  of  import  and  export. 

e)  The  technique  of  price  calculation. 

II.  The  applied  science  of  International  Commerce.  This 
treats  of  facts  and  conditions  existing  in  specific  localities  and 


COMMERCE  AND  ECONOMICS  21 

referring  to  specific  subjects.     It  can  be  grouped  under  three 
heads : 

a)  Commodities  in  International  Commerce.  This  takes  up 
all  classes  of  merchandise  and  furnishes  a  comprehensive  survey 
of  international  commerce  in  specified  commodities  throughout 
the  world,  as  for  instance  cotton,  wheat,  sugar,  coffee,  iron  and 
steel.  This  is  the  favorite  method  in  German  commercial  edu- 
cation and  forms  the  basis  of  Sonndorfer's  works  "Internationale 
Handelskunde"  and  "Technik  des  Welthandels"  and  many  other 
treatises. 

b)  Commercial  Geography,  treating  international  commerce 
concretely  by  markets. 

c)  National  export  and  import  practice,  offering  the  student 
an  insight  into  the  country's  advance  in  the  technique  of  export 
and  import. 

The  present  work  attempts  to  furnish  in  Part  I  an  outline 
of  the  theory  and  the  general  principles  of  international  com- 
merce, as  suggested  under  caption  I  above;  it  does  not  un- 
dertake the  stupendous  task  of  an  exhaustive  treatment  of  the 
applied  science  of  international  commerce  either  by  commodities 
or  countries  (Caption  II,  a  and  b),  particularly  as  the  re-group- 
ing of  state  and  economic  entities  suggests  a  dignified  presenta- 
tion of  these  subjects  by  competent  authors  at  some  future 
time,  not  too  remote,  we  may  hope. 

These  subjects  are  treated  with  particular  reference  to  post- 
war conditions. 

While  throughout  that  portion  of  this  work  which  deals  with 
the  theory  of  international  commerce  it  has  been  the  author's  aim 
to  present,  wherever  possible,  practical  applications  of  the  prin- 
ciples developed,  it  is  Part  II  which  deals  specially  with  mod- 
ern practice  in  international  commerce. 

A  work  dealing  with  the  practice  of  export  and  import  must 
necessarily  be  encyclopedic  in  character.  It  is  a  very  difficult 
task  to  present  in  one  volume  every  phase  of  international  com- 
mercial practice  without  the  risk  of  superficiality.  If  such  a 
work  can  adequately  prepare  the  student  for  a  thorough  under- 
standing of  the  intensive  study  units  and  special  treatises  deal- 
ing with  such  branches  as  document  technique,  insurance,  trans- 
portation, it  will  have  attained  its  aim. 


22  INTERNATIONAL  COMMERCE 

Here  excellent  books  have  been  published,  among  them 
"Practical  Exporting"  by  Olney  B.  Hough,  the  dean  of  American 
writers  on  export  topics,  and  Ernst  B.  Filsinger's  "Exporting  to 
Latin  America,"  both  of  which  are  considered  as  classics  in  this 
field,  and  only  lately  Norbert  Savay  attempted  in  a  masterly 
work  entitled  "Principles  of  Foreign  Trade"  to  present  in  one 
volume  information  covering  the  entire  domain  of  foreign  trad- 
ing. Meanwhile  the  literature  dealing  with  specific  phases  of 
international  commerce  is  daily  growing  in  volume  and  import- 
ance. 

In  view  of  the  excellent  manner  in  which  the  elementary 
side  of  practical  exporting  has  been  covered,  we  will  not  at- 
tempt in  the  second  part  of  this  work  to  present  a  systematic 
exposition  of  practical  exporting,  particularly  as  almost  all  of 
the  practical  methods  of  both  the  export  and  the  import  trade 
are  applications  to  local  conditions  of  the  principles  thoroughly 
considered  in  the  first  part  of  this  work. 

On  the  other  hand  history  has  made  rapid  strides  in  these 
latter  days.  The  businessman  is  confronted  with  changing  con- 
ditions. These  demand  his  study  and  consideration.  Questions 
of  clerical  routine,  faulty  packing,  inadequate  postage,  import- 
ant as  they  are,  must  be  left  to  books  dealing  with  elementary 
instruction,  and  yield  to  the  consideration  of  weightier  prob- 
lems. 

Some  subjects  allied  to  international  commerce,  as  Foreign 
Exchange,  Ocean  and  Inland  Transportation,  Marine  Insurance, 
are  adequately  covered  in  standard  works,  a  list  of  which  may 
be  found  in  the  bibliographic  table  at  the  end  of  this  work. 

We  have,  therefore,  selected  for  consideration  in  that  por- 
tion of  the  work  which  is  assigned  to  strictly  practical  phases 
of  international  commerce  the  following  topics:  The  Credit 
Problem  of  To-Day ;  Modern  Developments  in  American  Bank- 
ing; International  Law  in  Relation  to  Commerce;  Analysis  of 
the  Results  of  Trade  Promotion;  Modern  Publicity  Methods. 


CHAPTER  II. 

Basic  Factors  in  the  Development  of  International 
Commerce. 

i.    International  Merchants  as  a  Factor  in  the  Devel- 
opment of  International  Commerce. 

Commerce,  as  a  private  economic  activity,  is  naturally  af- 
fected, both  with  regard  to  its  volume  and  to  its  characteristics, 
by  the  nature  of  its  agencies,  that  is  of  the  individual  business 
houses  and  of  their  management.  The  development  of  inter- 
national commerce  from  this  point  of  view  is  therefore  greatly 
influenced  by  that  section  of  the  merchant  class  which  partici- 
pates in  it  immediately — the  international  merchant  class,  we 
might  say,  as  well  as  by  that  section  of  the  business  world  which 
enters  into  relations  with  the  international  merchant  class  either 
as  customers  or  as  furnishers  of  supplies. 

The  group  of  international  merchants  which  is  to  be  con- 
sidered in  the  commercial  relations  of  one  country  with  another 
may  be  located  in  the  two  countries  concerned,  or  as  in  the  case 
of  intermediate  commerce,  in  a  third  country.  The  group  of  in- 
ternational merchants  located  in  a  country  may  be  composed 
of  citizens  of  that  country  or  of  foreigners. 

The  international  merchant  located  in  the  exporting  country 
is  generally  a  national  of  the  exporting  country;  the  interna- 
tional merchant  located  abroad,  in  the  importing  country,  may 
also  be  a  national  of  the  exporting  country,  but  is  generally  a 
native  of  the  importing  country.  German  and  British  merchants 
have  frequently  settled  abroad  or  established  branches  abroad, 
and  in  certain  importing  markets,  as  we  shall  see,  an  important 
distinction  exists  between  native  merchants  and  foreigners  en- 
gaged in  the  importing  business.  Finally  the  international  mer- 
chant located  in  the  exporting  country  may  be  a  citizen  of  a  third 
country. 

The  extent  to  which  the  international  merchants  located  in 


24  INTERNATIONAL  COMMERCE 

the  exporting  country,  as  well  as  those  located  abroad,  are  na- 
tionals of  the  exporting  country  forms  a  criterion  of  the  export- 
ing activity  of  that  country.  Unquestionably  Germany  in  the 
period  of  her  greatest  commercial  expansion  before  the  world 
war,  and  Great  Britain,  with  her  marvelous  network  of  branches 
in  foreign  countries  and  in  her  dominions,  were  far  superior 
to  United  States  from  the  point  of  view  of  export  activity,  a 
condition  which  has  undergone  a  considerable  change  not  only 
with  the  curtailment  of  Germany's  physical  capacity  of  main- 
taining her  predominance  in  the  export  markets,  but  even  more 
so  with  the  growing  establishment  of  American  branch  offices 
and  agencies  abroad  and  with  the  unprecedented  use  by  Amer- 
ican exporters  of  the  weapon  of  publicity  abroad,  which  was 
almost  an  undeveloped  auxiliary  in  the  pioneer  days  of  modern 
international  commerce. 

Another  criterion  of  export  activity  is  also  the  extent  to 
which  the  international  merchant  of  a  country  seeks  out  foreign 
trade  of  his  own  initiative  or  is  solicited  by  foreign  inquirers, 
by  foreign  buyers,  either  through  correspondence  or  through 
personal  visits. 

Activity  or  passivity  in  international  commerce  greatly  in- 
fluence the  development  of  export  and  import  trade  in  general, 
and  of  trade  in  specific  commodities  in  particular. 

In  countries  passively  interested  in  international  commerce, 
foreign  merchants,  European  or  American,  are  obliged  to  do 
pioneer  work,  sometimes  undertaking  speculative  selling  trips  to 
those  countries  (generally  commercially  undeveloped  or  back- 
ward countries),  establishing  branches  there,  or  endeavoring  to 
interest  the  native  business  people  in  international  transactions 
through  written  solicitation  or  through  the  sending  of  traveling 
representatives. 

Under  these  circumstances  these  international  merchants 
endeavor  in  the  first  instance  to  introduce  in  these  passive  mar- 
kets the  products  of  their  own  nation,  and  to  export  from  those 
markets  to  their  home  land  such  native  products — generally  food- 
stuffs and  industrial  raw  products — as  their  home  land  requires. 

Should  the  passive  market  in  addition  to  these  articles 
produce  industrial  commodities,  in  other  words  manufactured 
goods,  the  foreign  international  merchant  will  only  then  interest 


BASIC  FACTOKS  25 

himself  therein,  if  the  handling  of  these  goods  yields  him  a 
greater  margin  of  profit  than  the  handling  of  kindred  goods  of 
his  own  home  production.  As  a  rule,  if  a  commercially  back- 
ward country  produces  manufactured  goods,  its  capacity  to  com- 
pete in  the  world  trade  is  very  limited,  and  the  foreign  inter- 
national merchant  would  find  it  very  difficult  to  market  them  in 
his  own  home  land,  for  which  reason  the  industry  of  a  country 
which  is  passive  from  the  point  of  view  of  international  com- 
merce can  only  in  exceptional  circumstances  depend  upon  for- 
eign merchants  to  market  its  industrial  products. 

But  it  can  look  to  the  merchants  of  its  own  country  who 
deal  with  foreign  merchants ;  to  its  own  banks ;  to  the  sagacity 
of  its  own  government  which  should  strive  to  assist  the  infant 
export  industry  in  making  those  initial  efforts  and  sacrifices 
which  are  required  to  gain  a  competing  footing  in  the  world's 
markets. 

The  foreign  merchant,  however,  working  along  the  lines  of 
least  resistance,  will  make  it  his  business  to  sell  in  such  markets 
the  products  of  his  own  nation;  to  buy  in  those  markets  the 
foodstuffs  and  raw  materials  needed  by  his  own  nation ;  and  will 
interest  himself  in  the  promotion  of  the  sale  of  native  manufac- 
tured products  only  in  exceptional  cases. 

Therefore  the  development  of  the  export  trade  in  manufac- 
tured products  requires  a  vigorous  export  activity  from  the  home 
land;  whereas  the  development  of  the  import  trade,  and  of  the 
export  trade  in  raw  products,  particularly  such  as  are  needed  by 
manufacturing  countries,  can  progress  even  through  merchants 
of  foreign  allegiance,  where  the  domestic  business  people  main- 
tain a  passive  attitude  to  international  commerce. 

Translated  into  practical  application  for  the  American  busi- 
ness man,  this  truth  teaches  that  the  promotion  of  the  export  of 
American  manufactured  goods  depends  entirely  upon  the  efforts 
and  the  activity  of  American  exporters,  and  the  growth  of  Amer- 
ican exports  of  manufactured  goods  is  co-incident  with  the 
abandonment  of  the  old  policy  of  entrusting  their  sale  to  foreign 
agents  and  connections,  of  waiting  for  chance  inquiries,  and  of 
haphazard  methods. 

The  export  merchant,  in  order  to  be  successful,  requires  the 
possession  of  certain  qualifications. 


26  INTEENATIONAL  COMMERCE 

In  the  first  place  he  must  be  enterprising.  The  retail  mer- 
chant in  a  small  community  knows  his  customers;  he  does  not 
have  to  hunt  them  up.  The  export  merchant  must  hunt  and  fish 
for  customers.  He  must  be  enterprising  enough  to  seek  out 
foreign  and  distant  markets  for  his  goods.  He  must  study  the 
peculiarities,  the  likes  and  dislikes  of  these  markets.  He  must 
be  sufficiently  interested  and  well-informed  to  acquaint  himself 
intelligently  with  business  conditions  and  with  business  houses 
abroad,  to  open  relations  with  them;  he  must  be  courageous 
enough  to  travel  abroad,  to  settle  abroad  if  necessary,  though 
residence  abroad  may  involve  hardships ;  he  must  be  ambitious 
enough  to  familiarize  himself  with  the  necessarily  involved  tech- 
nique and  routine  of  foreign  trade;  he  must  be  speculative 
enough  to  take  up  dealings  with  the  other  end  of  the  world  with 
the  same  equanimity  with  which  a  domestic  merchant  may  trans- 
act business  over  the  telephone;  and  occasionally  he  must  be 
prepared  to  chance  his  luck  with  a  prospectively  lucrative  enter- 
prise though  it  be  not  lacking  in  elements  of  risk. 

In  the  second  place  he  must  be  competent.  He  requires  a 
superior  education,  whether  acquired  in  college  or  in  the  school 
of  life.  He  must  be  capable  of  mastering  the  complicated  tech- 
nique of  world  trade,  to  have  an  insight  into  those  manifold  and 
frequently  involved  political,  economic,  legal  and  other  condi- 
tions which  affect  the  various  phases  of  international  commerce. 
He  should  know  foreign  languages.  He  must  know  the  peculi- 
arities of  the  people  with  whom  he  seeks  to  have  commercial 
dealings.  He  must  know  the  commercial  usages  of  foreign  mar- 
kets, he  must  be  conversant  with  market  conditions  abroad  and 
with  local  demands.  He  must  organize  his  staff  correctly,  and 
he  must  adapt  it  to  the  peculiarities  of  specific  marketing  con- 
ditions, both  with  regard  to  specific  commodities  and  to  specific 
localities.  He  must  know  the  importance  of  accuracy,  prompt- 
ness and  honesty  in  international  dealings. 

Accuracy  in  making  offers,  exactness  in  concluding  deals, 
and  positive  knowledge  that  what  he  undertakes  to  do  he  can 
also  carry  out  are  essential  to  an  export  merchant.  Orders  must 
be  executed  with  mathematical  accuracy.  Times  of  delivery- 
must  be  strictly  adhered  to.  The  various  officially  required  for- 
malities must  be  duly  observed.     Accuracy  and  promptness  are 


BASIC  FACTORS  27 

particularly  important  in  international  trade,  for  goods  must 
make  long  journeys  before  reaching  their  destination.  The  con- 
sequences of  inaccuracy  are  frequently  disastrous  in  international 
commerce.  The  chances  of  correcting  errors  and  inaccuracies 
are  very  poor  as  compared  with  the  domestic  trade.  And  the 
retention  of  a  customer  in  international  commerce  is  absolutely 
dependent  upon  the  most  painstaking  accuracy  and  promptness. 

Anything  that  savors  of  sharp  practice  must  be  punctiliously 
avoided.  The  merchants  of  a  whole  nation  may  suffer  through 
the  painful  impression  produced  by  a  semblance  to  sharp  prac- 
tice, sometimes  the  fault  of  an  unintelligent  employee.  Con- 
fidence is  the  basis  of  success  in  international  commerce.  It  re- 
quires good  faith  on  the  one  hand  and  confidence  on  the  other  to 
carry  on  a  satisfactory  business  transaction  where  the  buyer  and 
seller  have  never  met  one  another,  speak  different  languages, 
are  separated  by  many  thousands  of  miles  and  part  sometimes 
for  months  one  from  his  money,  the  other  from  his  goods. 

Next  in  importance  is  the  wisdom  in  pricing.  Whether  in- 
troducing an  article  without  competition,  or  one  in  which  com- 
petition may  be  sooner  or  later  encountered,  the  merchant  jealous 
of  his  success  will  make  his  prices  reasonable,  taking  into  con- 
sideration cost,  expense  and  reasonable  profit,  as  well  as  the 
prevailing  market  conditions. 

A  further  characteristic  of  a  competent  international  mer- 
chant is  prudence  in  engagements,  neither  too  excessive  to  kill 
his  readiness  to  take  a  reasonable  chance  where  circumstances 
warrant  it,  nor  inadequate  to  involve  him  in  risky  speculations. 

Lastly  the  export  merchant  must  be  thoroughly  efficient. 
He  must  be  adequately  equipped  from  the  point  of  view  of  fin- 
ance. He  must  maintain  a  proper  organization  to  take  care  of 
business  in  widely  scattered  foreign  territories,  or  where  he 
limits  himself  to  trade  with  one  particular  foreign  market  still 
with  a  market  located  a  certain  distance  from  his  base.  And 
he  must  have  a  sufficient  capital  to  pay  cash  for  his  purchases, 
to  grant  credit  where  necessary,  and  to  take  care  of  the  incidental 
expenses  of  shipping.  He  must  be  financially  in  such  shape  as 
to  command  the  confidence  of  the  customer,  who  entrusts  him 
with  his  money ;  of  the  producer,  who  entrusts  him  with  his 
manufacturing  facilities,  outlay  for  labor  and  material,  and  with 


28  INTERNATIONAL  COMMERCE 

his  goods ;  of  the  banks  whose  co-operation  becomes  daily  more 
important  in  international  commerce. 

The  unusual  conditions  brought  about  by  the  world  war 
have  been  responsible  for  the  launching  upon  the  troubled  sea 
of  international  commerce  of  countless  small  firms  in  the  export 
trade,  and  if  any  of  these  have  survived  the  period  of  export 
restrictions,  they  will  have  a  very  difficult  task  ahead  of  them 
unless  they  had  made  enough  money  and  gained  a  sufficient  pres- 
tige during  the  war  to  insure  their  efficiency  in  the  future.  The 
first  decade  after  the  signing  of  peace  will  witness  an  era  of 
gigantic  combinations  in  the  export  field.  International  com- 
merce is  swiftly  entering  upon  a  stage  when  markets  must  be 
cultivated  on  a  large  scale.  The  adjustment  of  international 
trade  conditions  will  be  as  far-reaching  in  its  effects  as  the 
displacement  of  the  stage  coach  by  the  locomotive.  Producers 
and  merchants  both  in  the  -United  States  and  in  Great  Britain 
realize  this.  In  the  United  States  the  Webb  bill  has  anticipated 
this  condition.  Banks  and  financial  companies  in  both  countries 
have  made  thorough-going  preparations  to  cope  with  it,  and  the 
inefficient  export  merchant  will  find  himself  outstripped,  out- 
generaled and  largely  eliminated. 

Whatever  has  been  said  of  the  export  merchant,  is  equally 
true  of  the  import  merchant.  Export  and  import  are  very  often 
united  in  one  firm,  because  the  machinery  for  operating  both  is 
closely  paralleled.  And  the  foregoing  remarks  are  also  true  of 
those  producers  who  have  installed  their  own  export  organ- 
izations. As  far  as  their  export  department  is  concerned,  they 
are  export  merchants.  Manufacturers  who  are  doing  a  direct 
export  business  must  have  that  phase  of  their  enterprise  in  charge 
of  a  competent  manager  whose  qualifications,  in  addition  to  those 
mentioned  above  for  export  merchants,  must  comprise  also  a 
thorough  technical  knowledge  of  the  line  and  the  fullest  famili- 
arity with  the  modern  methods  of  marketing  it  in  foreign  coun- 
tries. 

Next  to  proper  organization  and  efficient  management,  the 
manufacturer  taking  up  direct  exporting  must  guard  against 
certain  tendencies  which  are  likely  to  prove  stumbling  blocks. 

The  first  of  these  tendencies  against  which  the  exporting 
manufacturer  must  guard  is  the  failure  to  quote  reasonable  prices 


BASIC  FACTORS  29 

for  his  products.  The  export  merchant  faces  both  foreign  and 
domestic  competition,  and  he  is  too  greatly  concerned  in  the 
promotion  of  his  business,  which  is  to  export  goods,  to  make  the 
mistake  of  trying  to  build  up  his  business  on  the  basis  of  ex- 
travagant quotations. 

But  the  manufacturer's  principal  business  is  in  his  home 
market.  He  takes  up  export  perhaps  in  order  to  increase  his 
production  and  to  carry  on  his  manufacturing  on  a  big  scale; 
or  he  may  be  anxious  to  secure  an  outlet  valve  for  temporary 
overproduction.  The  manufacturer  may  not  be  fully  conscious 
of  the  true  function  of  export,  or  of  the  conditions  prevailing 
in  the  world's  markets,  and  may  consider  himself  entitled  to 
higher  prices  when  condescending  to  sell  abroad. 

But  in  the  foreign  markets  the  buyers  have  been  spoiled  by 
a  very  keen  competition,  and  though  they  may  under  protest 
pay  unwarranted  prices  for  articles  in  which  there  is  either  little 
competition  or  a  temporary  excess  of  demand  over  supply,  this 
condition  is  not  likely  to  last  long.  The  manufacturer  must 
realize  that  although  the  technique  of  export  trade  is  slightly 
more  involved  than  in  the  home  trade,  he  has  in  the  combined 
markets  of  the  world  a  vaster  field  for  his  activity  than  at  home, 
and  the  export  business  is  even  more  secure  than  the  home  busi- 
ness, for  it  never  is  "slack"  all  over  the  world  at  a  given  time. 
For  this  reason  exaggerated  prices  are  unwarranted. 

The  second  error  is  to  regard  foreign  markets  as  inferior, 
suitable  for  the  dumping  of  products  unsaleable  at  home.  This 
is  a  fatal  error.  Unless  the  manufacturer  studies  the  demand 
and  the  tastes  of  foreign  markets,  he  will  never  make  a  success 
of  selling  abroad,  even  though  under  certain  conditions  he  may 
be  able  to  dispose  abroad  of  some  material  unsaleable  at  home. 
This  need  not  discourage  the  manufacturer  from  educating 
customers  and  consumers  in  foreign  markets  to  adopt  and  even 
to  demand  styles,  shapes  and  methods  to  which  they  are  unac- 
customed. But  this  requires  tact,  diplomacy  and  skill,  as  well 
as  initial  expense.  Nothing  should  be  forced  upon  foreign 
buyers. 

The  third  and  the  most  common  error  on  the  part  of  man- 
ufacturers is  to  turn  to  the  export  market  for  their  own  con- 
venience when  there  is  a  temporary  cessation  of  home  demand. 


30  INTERNATIONAL  COMMERCE 

The  foreign  market  is  not  always  available  at  will.  And  it  is 
just  as  difficult  to  create  a  steady  circle  of  customers  abroad  as 
at  home.  Customers  abroad  must  be  wooed,  and  when  won  they 
must  be  catered  to,  and  their  needs  must  be  provided  for,  or 
they  will  not  be  available  when  wanted,  certainly  not  if  they 
are  left  in  the  lurch  after  creating  among  their  clientele  a  de- 
mand for  a  manufactured  line,  and  the  excuse  that  home  de- 
mand forbids  the  manufacturer  to  take  care  of  them  is  not  likely 
to  retain  their  good-will. 

And  where  the  manufacturer  does  not  deal  direct,  but  re- 
sorts to  the  mediation  of  export  merchants,  he  must  bear  all 
the  foregoing  in  mind  as  well.  He  must  be  accurate,  prompt 
and  efficient.  In  order  that  the  export  merchant  may  fulfil  his 
duty  to  his  customers,  the  manufacturer  must  support  the  ex- 
port merchant  or  agent  by  quoting  him  the  lowest  possible  prices, 
by  supplying  him  with  samples,  and  by  making  it  worth  his 
while  to  push  his  particular  product  as  against  the  products  of 
his  competitors. 

The  development  of  a  national  export  trade  is  furthered  by 
associations,  by  the  growth  of  auxiliaries  and  by  public  pro- 
motion. 

The  growth  of  export  trade  is  greatly  influenced  by  the  ex- 
tent to  which  manufacturers  and  export  merchants  proper  par- 
ticipate in  export  activities;  by  the  development  of  exporting 
centers ;  by  association  into  public  bodies  such  as  in  United  States 
the  National  Foreign  Trade  Council,  the  Chamber  of  Commerce 
of  United  States  of  America,  the  National  Association  of  Man- 
ufacturers, the  American  Manufacturers'  Export  Association; 
by  auctions,  markets  and  exchanges,  such  as  the  Cotton  Ex- 
change, Coffee  Exchange,  Produce  Exchange  in  New  York,  or 
abroad  the  Lyons  Sample  Fair,  the  Leipsic  Fair,  etc. ;  by  organ- 
izations which  lately  have  become  possible  under  the  Webb  bill. 
The  effect  and  the  proper  sphere  of  activity  for  such  associa- 
tions will  be  considered  in  detail  in  the  latter  part  of  this  work. 

Auxiliary  commercial  institutions  which  are  intimately  con- 
nected with  the  development  of  export  trade,  though  not  directly 
engaged  in  merchandizing,  are  banks  with  foreign  departments, 
branches  abroad  and  connections  in  foreign  countries,  insurance 
companies  specializing  in  ocean  risks ;    freight  forwarding  com- 


BASIC  FACTORS  31 

panies,  shipping  companies;  credit  information  bureaus,  and  ex- 
pert appraisers. 

Banking  facilities  in  connection  both  with  export  and  import 
play  a  very  important  role.  Their  activities  will  be  properly 
considered  in  Part  II,  but  an  exhaustive  study  of  modern  bank 
technique  in  its  effect  upon  international  commerce,  particular- 
ly in  the  light  of  the  great  progress  made  in  the  United  States 
under  modern  federal  legislation  deserves  a  special  treatise  to 
do  justice  to  the  subject. 

At  this  point  it  may  suffice  to  mention  that  banking  facilities 
in  export  and  import  trade  are  furnished  a)  by  branches,  agen- 
cies and  correspondents  of  foreign  banks  established  in  the 
export  centers  and  b)  by  domestic  banks  having  branches,  agen- 
cies and  correspondents  abroad.  While  the  service  of  the  latter 
in  its  present  extent  is  a  recent  development  in  the  United  States 
as  far  as  the  equipment  of  branches  and  agencies  abroad  is  con- 
cerned, nonetheless  American  manufacturers  and  exporters  can 
avail  themselves  to  better  advantage  of  their  mediation,  and  the 
prospects  of  their  increasing  participation  (through  their  foreign 
branches)  in  the  financing  of  great  foreign  enterprises  opens  up 
a  vista  of  greatly  heightened  utility  and  of  vaster  facilities  for 
American  manufacturers  and  exporters. 

The  development  of  domestic  banks  with  international  con- 
nections is  a  prime  prerequisite  of  a  great  and  successful  export 
and  import  trade,  as  is  also  a  wise  and  liberal  legislation  regu- 
lating the  functions  of  the  banks  in  international  transactions. 

Both  in  the  insurance  and  in  the  freight  forwarding  end 
the  service  of  domestic  concerns  with  branches  or  correspondents 
of  their  own  in  foreign  ports  and  trade  centers  is  an  essential 
auxiliary  to  export  trade. 

Credit  information  through  well  organized  agencies  with 
offices  and  correspondents  abroad  is  another  important  factor 
in  the  smooth  development  of  international  commerce.  In  this 
particular  also  great  progress  has  been  made  in  the  United 
States,  and  this  phase  will  be  discussed  in  detail  in  Chapter  XV. 

Last  in  the  list  of  auxiliaries,  are  the  sworn  appraisers,  ex- 
perts and  inspectors,  whose  impartial  judgment  is  depended  upon 
both  by  the  seller  and  the  buyer  in  determining  the  quantity  and 


32  INTERNATIONAL  COMMERCE 

the  quality  of  various  products  and  commodities  in  export  and 
import  shipments. 

International  commerce  is  finally  furthered  by  public  pro- 
motion. This  means  Governmental  promotion  in  the  first  in- 
stance, consisting  in  the  United  States  of  services  furnished  by 
the  State  Department,  through  its  Foreign  Trade  Adviser  divi- 
sion, and  the  American  consular  corps  which  in  recent  years 
has  greatly  advanced  in  usefulness  and  efficiency;  the  Depart- 
ment of  Commerce,  with  the  magnificently  equipped  Bureau  of 
Foreign  and  Domestic  Commerce,  its  branches  and  sub-branches 
in  various  cities,  its  experts  traveling  as  trade  commissioners 
in  foreign  countries ;  the  service  of  Commercial  Attaches,  who 
are  attached  to  embassies  under  the  direction  of  the  Department 
of  Commerce;  secondly,  promotion  by  public  associations,  some 
of  which  have  been  mentioned,  furthering  the  general  export  in- 
terests of  American  commerce;  organizations  devoted  to  the 
promotion  of  the  interests  of  specified  industries;  American 
chambers  of  commerce  abroad ;  chambers  of  commerce  in  vari- 
ous American  cities  having  foreign  departments. 

In  addition  to  this  passing  and  incomplete  mention,  the  ac- 
tivities of  these  bodies  are  thoroughly  reviewed  in  Chapter  XIX. 

2.    Competitiveness  as  a  Factor  in  the  Development 
of  International  Commerce. 

In  order  to  make  it  possible  to  import  a  certain  line  of  goods 
into  a  country,  the  premises  are  that  either  the  production  in 
the  importing  country  cannot  fully  cover  its  demand  for  this  par- 
ticular class  of  goods,  or  that  another  country,  which  desires  to 
export  these  goods,  has  such  an  advantage  over  it  in  the  matter 
of  cost  of  production  that  the  addition  of  the  cost  of  importa- 
tion does  not  fully  counterbalance  it. 

But  in  order  to  cause  this  same  importing  country  to  obtain 
these  goods  from  one  exporting  country  in  preference  to  others, 
it  is  necessary  that  no  other  exporting  country  shall  offer  more 
favorable  conditions  for  the  covering  of  this  demand,  taking 
into  consideration  the  cost  of  production  and  the  cost  of  impor- 
tation. 

Efficiency  in  production  is  therefore  the  basis  of  ability  to 


BASIC  FACTORS  33 

compete  in  the  international  trade.  Superior,  or  at  least  equal 
efficiency  in  production  determines  the  ability  of  one  country 
to  compete  with  another  in  exporting  a  given  article  to  a  given 
market. 

Efficiency  in  production  may  be  qualitative  or  quantitative. 
qualitatively  efficient  is  the  production  if  the  cost  of  produc- 
tion, with  due  regard  to  the  quality  of  the  goods,  or  in  some 
cases  to  the  appearance,  to  the  matter  of  meeting  the  tastes  or 
needs  of  the  foreign  buyer,  plus  the  costs  of  importation,  allows 
the  article  to  be  set  down  in  the  importing  country  under  condi- 
tions which  make  it  more  desirable  than  a  competing  article 
furnished  by  another  country. 

Quantitatively  the  efficiency  of  production  affects  the  com- 
petitiveness of  an  article  by  the  ability  of  furnishing  greater 
quantities,  of  offering  prompter  deliveries,  or  of  filling  orders 
of  unusual  size. 

Without  the  competitiveness  of  the  production  the  most 
energetic  export  merchants  cannot  achieve  permanent  results  in 
promoting  the  export  trade  of  their  country. 

It  is  the  domain  of  political  economy  to  analyze  the  factors 
which  determine  the  competitiveness  of  the  production  in  any 
country.  We  may  cursorily  mention  a  few  of  the  most  import- 
ant of  these  factors,  emphasizing  those  which  are  of  commercial 
nature. 

a)  Natural  factors.  The  quality  of  the  soil,  climatic  con- 
ditions, mineral  wealth  and  resources  for  exploiting  it  on  a  pay- 
ing basis,  a  geographically  intimate  connection  between  raw  anC 
auxiliary  products  on  the  one  hand  and  the  natural  sources  of 
power  on  the  other. 

b)  Physical  and  mental  factors.  Physical  strength,  intelli- 
gence, industry,  accuracy,  inventiveness,  skilled  labor. 

c)  Social  factors.  Improved  living  conditions  of  the  labor- 
ing class.  These  lead  to  a  demand  for  higher  wages,  and  also 
to  the  increase  in  the  efficiency  of  labor,  to  technical  advances 
in  production,  to  improvement  in  the  quality  of  the  goods,  to  the 
use  of  labor-saving  machinery,  to  a  higher  standard  of  produc- 
tion, to  inventiveness,  patents,  trade-marks,  styles,  etc.,  finally 
to  an  elevated  standard  of  living  all  around  and  an  increasing 
demand  for  goods  to  satisfy  same. 


34  INTERNATIONAL  COMMERCE 

d)  Economic  factors.  The  increase  of  wealth  raises  the 
buying  ability  of  a  people,  which  is  the  prerequisite  of  increased 
domestic  sales.  The  ability  to  secure  capital  at  a  low  rate  of 
interest  is  another  direct  consequence  of  the  increase  of  wealth, 
and  in  its  turn  leads  to  the  creation  of  great  industrial  under- 
takings, to  improved  methods  of  transportation,  to  intensive  ex- 
ploitation of  mines,  oil  wells,  etc.  The  rate  of  interest  is  also 
lowered  by  the  development  of  credit  institutions  and  of  indus- 
trial combinations.  Finally  the  development  of  mass  produc- 
tion, permitting  a  most  thorough-going  division  of  labor,  stand- 
ardization and  specialization,  and  therefore  the  production  of 
goods  in  immense  quantities  at  lowest  possible  prices,  in  spite 
of  high  wages,  and  of  splendid  returns  for  capital  invested,  and 
of  superior  quality  of  the  product. 

e)  A  great  domestic  market  secured  by  a  reasonably  protective 
tariff.  Granting  the  tremendous  economic  value  of  export  trade, 
an  industry  which  depends  upon  export  trade  alone  has  no  secure 
foundation.  For  a  mere  change  in  the  tariff  policy  of  the  cus- 
tomer-country may  kill  overnight  the  most  carefully  built  export 
trade  with  a  given  country.  Only  drawing  its  strength  from  a 
constant,  growing,  profitable  exploitation  of  a  vast  domestic  mar- 
ket can  an  industry  build  up  a  profitable  export  trade.  On  the 
other  hand  the  domestic  market  must  be  suitably  protected 
against  the  invasions  of  the  products  of  countries  where  living 
conditions  of  labor,  or  the  export  policy  of  the  state  permit  the 
dumping  of  products  in  the  home  market  of  competitors  at  a 
price  which  may  ultimately  outweigh  superior  quality  and  stand- 
ardized production.  And  a  protective  tariff,  it  may  be  frankly 
admitted,  permits  the  reasonable  pricing  of  manufactured  goods 
for  home  consumption,  leaving  the  producer  free  to  charge  some- 
what lower  prices  for  exported  goods,  thus  counterbalancing  to 
some  extent  the  cost  of  importation  abroad,  and  increasing  the 
competitiveness  of  exported  products  when  they  reach  the  for- 
eign market ;  exported  goods  must  be  set  down  in  the  foreign 
market  on  a  competitive  basis:  the  difference  in  price  between 
them  and  the  lower  priced  competing  goods  must  not  be  too 
great,  even  granting  superior  quality,  lest  the  foreign  buyer  for 
reasons  of  economy  regretfully  decide  to  buy  the  cheaper,  if  in- 


BASIC  FACTOES  a5 

ferior  article  of  the  competition.  In  other  words,  the  difference 
in  price  must  not  be  out  of  proportion  to  the  superiority  of  the 
article. 

f)  Enterprise  and  energy  of  manufacturers.  International 
competitiveness  depends  to  a  great  extent  upon  the  degree  of 
education  in  the  exploiting  of  export  markets  possessed  by  man- 
ufacturers. Recent  years  have  seen  an  almost  miraculous  ad- 
vance on  the  part  of  American  manufacturers  from  a  state  of 
semi-tolerance  and  an  almost  academic  interest  in  foreign  trade 
to  that  present  state  of  the  recognition  of  its  importance  which 
has  drawn  the  foremost  industrial  leaders  to  work  for  the  pro- 
motion of  America's  share  in  international  commerce,  and  is 
leading  countless  young  men  throughout  the  country  to  a  serious 
study  of  international  commerce  as  a  profession  on  par  with 
medicine,  law,  engineering,  etc. 

g)  Adaptability.  Finally  an  important  commercial  factor 
in  increasing  the  competitiveness  of  an  article  is  the  readiness  of 
manufacturers  to  study  foreign  conditions  at  first  hand  and  10 
pay  attention  to  the  wants  and  the  requirements  of  foreign  mar- 
kets, with  a  view  to  adapting  their  products  as  far  as  possible 
to  the  needs  of  the  markets  for  which  they  are  destined. 

3.     Traffic  Conditions  as  a  Factor  in  the  Development 
of  International  Commerce. 

Traffic  contditions  as  a  factor  in  the  development  of  Inter- 
national Commerce  are  affected  by  natural  premises,  economic 
devices  and  artificial  hindrances. 

The  natural  premises  are  to  be  found  in  those  outward  na- 
tural conditions  which  form  the  basis  of  traffic  development : 
navigable  rivers,  the  sea  and  the  plain  as  the  natural  traffic 
routes ;  mountain  ranges  as  natural  traffic  obstacles ;  the  situa- 
tion of  producing  territories  in  relation  to  these  routes  and  ob- 
stacles or  in  relation  to  the  consuming  territories. 

Economic  arrangements  for  the  promotion  of  traffic  and 
transportation  are  artificial  transport  routes,  such  as  roads, 
canals,  river  improvements,  port  constructions,  media  of  com- 
munication such  as  telegraphs,  cables,  telephones,  the  post,  rail- 
ways, river,  lake,  canal  and  ocean  shipping,  wagons,  trucks,  cara- 


36  INTEENATIONAL  COMMERCE 

vans,  warehouses,  and  the  organized  freight  forwarding  service. 

Artificial  hindrances  of  traffic  are  the  quarantine,  blockade 
in  times  of  war  or  suspension  of  relations  between  countries, 
contraband  regulations,  activities  of  pirates  and  land  robbers, 
frontier  regulations  of  countries,  states,  provinces,  municipalities, 
tribes  and  similar  impediments. 

Traffic  conditions  affect  international  commerce  inasmuch 
as  they  affect  the  carriage  of  persons,  communications  and 
goods.  The  carriage  of  persons  is  of  importance  in  facilitating 
the  meeting  between  buyer  and  seller ;  the  carriage  of  news  fa- 
cilitates the  communication  between  buyer  and  seller,  leading  to 
the  negotiation  and  finally  to  the  conclusion  of  business  deals; 
and  lastly  the  carriage  of  goods  forms  the  fundamental  basis  of 
international  commerce. 

The  extent  to  which  traffic  conditions  facilitate  the  course 
of  international  commerce  is  of  greater  importance  than  in  do- 
mestic commerce,  because  in  international  commerce  the  dis- 
tances between  the  seller  and  the  buyer  are  generally  greater. 
The  principal  element  in  this  connection  is  the  cost  of  transpor- 
tation. While  it  is  not  of  equal  importance  for  all  classes  of 
goods,  nevertheless  the  item  of  transportation  cost,  together  with 
the  item  of  customs  duties,  affects  the  competitiveness  of  an 
article.  It  may  make  an  article  incapable  of  competition,  al- 
though from  the  point  of  view  of  production  cost  and  efficiency 
it  be  competitive,  and  on  the  other  hand  it  may  make  an  article 
capable  of  competition,  although  from  the  point  of  view  of  pro- 
duction cost  and  efficiency  it  was  not  competitive  to  start  with. 

The  element  of  traffic  conditions  affects  also  the  concentra- 
tion of  merchandise  in  certain  points.  Favorable  traffic  condi- 
tions are  responsible  for  the  origin  and  growth  of  trading  centres. 
In  the  early  history  of  commerce  the  development  of  commer- 
cial activity  was  bound  to  the  route  which  the  merchandise  ship- 
ment took.  Business  could  be  carried  on  only  from  the  spot 
where  goods  were  located  or  expected.  Nowadays  commercial 
transactions  are  concluded  by  merchants  located  in  trading  cen- 
tres where  the  goods  bought  or  sold  may  never  be  seen.  A  com- 
mercial technique  has  been  developed  making  this  condition 
rather  the  rule  for  some  classes  of  goods.  While  this  condition 
appears  as  a  sort  of  emancipation  from  traffic  conditions,  never- 


BASIC  FACTORS  37 

theless  it  is  the  outgrowth  of  the  development  of  transportation 
routes  and  media.  Only  the  highly  developed  state  of  transport 
media  for  persons  and  communications  permits  the  merchant  to 
sell  as  a  middleman  merchandise  which  he  neither  accepts  nor 
delivers  in  person,  because  he  can  issue  instructions  which  he 
knows  will  be  promptly  and  accurately  carried  out,  and  which 
he  can  control  with  very  little  loss  of  time. 

However,  business  carried  on  in  this  way  is  never  the  prin- 
cipal source  of  the  commercial  activity  of  a  trading  center. 
Actual  storing  of  merchandise  in  warehouses  and  actual  ship- 
ment guides  the  bulk  of  international  commerce  activities  to  im- 
portant maritime  ports.  For  this  reason  the  traffic  radius  of  a 
trading  center  still  coincides  with  its  selling  radius,  although 
here  and  there  are  places  which  are  more  important  as  traffic 
centers  than  as  trading  centers,  as  for  instance  Rotterdam.  In 
all  of  the  important  traffic  centers  the  tendency  is  to  seek  the 
control  of  the  commerce  that  goes  through  it,  and  the  trading 
center  from  which  the  traffic  in  goods  sold  therefrom  is  alienated 
cannot  fully  retain  control  of  the  commerce  in  question  (San 
Francisco  and  Seattle  with  relation  to  the  Far  East  trade  illus- 
trate this  point). 

Transportation  facilities,  to  afford  the  maximum  of  benefit 
to  commerce,  must  meet  the  following  requirements :  a)  security, 
b)  speed,  c)  frequency  and  regularity  of  service,  d)  cheapness, 
e)  simplicity  of  routine  and  f )  suitability  of  individual  transport 
media. 

a)  Security.  Taking  first  the  matter  of  the  carriage  of 
communications — which  is  an  essential  element  in  facilitating 
commercial  transactions  beween  persons  separated  by  any  dist- 
ance, we  have  an  illustration  of  a  safe  and  cheap  facility  (for 
certain  distances)  in  the  telephone:  here  we  have  security,  as 
the  communicating  parties  can  be  personally  identified ;  speed- 
practically  instantaneous;  all  the  other  requirements  are  also 
fully  met. 

Next  to  the  telephone  we  have  the  postal  service.  This  has 
been  highly  developed  and  being  managed  by  governments,  with 
international  agreements  covering  the  service  between  countries, 
it  affords  the  security  of  official  supervision  and  responsibility; 
it  carries  communications  with  as  much  speed  as  is  humanly  at- 

-    43117 


38  INTEBNATIONAL  COMMERCE 

tainable  in  the  forwarding  of  written  messages;  and  the  risk  is 
only  limited  to  acts  of  God  and  to  the  delays  of  censorship  and 
of  blockades  in  times  of  war. 

Lastly  we  have  the  telegraph,  the  cable  and  the  wireless  ser- 
vice. Here  the  essential  characteristic  is  speed.  Commerce  be- 
tween distant  points  largely  depends  upon  these  services,  though 
the  element  of  insecurity  is  comparatively  high,  as  messages  are 
liable  to  mutilation  in  the  course  of  transmission.  But  the  ne- 
cessity of  securing  practically  instantaneous  connections  with  dis- 
tant points  outweighs  the  element  of  insecurity,  particularly  as 
ingenious  devices  have  been  developed  to  counteract  the  risk  of 
mutilations. 

In  the  carriage  of  goods  and  of  persons  we  find  the  element 
of  security  exemplified  in  the  train  service  on  well  regulated 
railroads  in  progressive  countries.  In  navigation  the  element  of 
security  is  a  little  lower,  and  here  we  find  gradations  of  security 
— inland  navigation  being  considered  safer  than  ocean  naviga- 
tion; in  the  case  of  the  latter  again  the  element  of  security  is 
higher  in  steamers  than  in  sailing  vessels.  Even  among  indi- 
vidual vessels  the  element  of  security  varies  with  the  age  and 
the  equipment  of  the  vessels,  as  those  provided  with  the  wireless 
apparatus  compared  with  vessels  lacking  it.  Of  all  media  of 
transportation  the  characteristic  of  the  lowest  degree  of  security 
is  illustrated  by  a  caravan  passing  through  territories  subject 
to  attacks  by  uncivilized  tribes. 

The  element  of  insecurity  in  means  of  transportation  leads 
to  transport  insurance.  The  degree  of  the  risk  is  determined  by 
the  degree  of  insecurity  of  the  transportation  and  by  the  value 
of  the  goods.  Therefore  almost  all  goods  shipped  by  sea  as 
freight  are  insured,  whereas  in  the  case  of  articles  transmitted 
through  the  post  only  those  of  exceptional  value  are  registered 
or  insured. 

Security  in  transportation  is  one  of  the  bases  of  modern  in- 
ternational commerce.  The  improvement  in  the  means  of  trans- 
portation with  the  view  of  increasing  the  degree  of  security  af- 
forded by  them,  the  pacification  and  the  civilization  of  undevel- 
oped territories  are  the  premises  on  which  international  com- 
merce has  expanded  and  made  it  possible  to  sell  goods  every- 
where at  low  prices. 


BASIC  FACTOBtt  M 

b)  Speed.  Speed  in  transportation  is  another  impoitant  ele- 
ment in  the  development  of  international  commerce.  It  ir  not  only 
important  in  the  matter  of  carrying  persons  and  communications, 
but  also  in  the  carriage  of  goods.  The  speed  of  transport  media 
has  made  it  possible  to  conclude  business  on  the  basis  of  guaran- 
teed time  delivery.  In  the  earlier  days  of  international  com- 
merce goods  were  largely  shipped  to  destination  unsold,  the  en- 
deavor being  to  dispose  of  them  at  the  best  possible  prices. 
Nowadays  it  is  possible  to  receive  an  inquiry  for  goods,  to  make 
an  offer,  to  receive  an  order,  to  ship  the  goods  and  to  receive 
the  purchase  price  all  within  a  reasonable  space  of  time,  and  this 
is  the  modern  method  of  international  commerce.  The  risk  and 
the  speculation  involved  in  the  obsolete  method  hindered  the 
expansion  of  international  commerce.  But  even  to-day  the  ele- 
ment of  celerity  is  an  important  factor.  Where  goods  cannot 
be  delivered  in  time  to  be  of  use,  business  between  two  points 
cannot  develop.  We  are  on  the  threshold  of  a  new  era  in  trans- 
portation with  the  prospect  of  the  development  of  commercial 
aerial  transportation. 

c)  The  next  factor  in  importance  is  the  frequency  and  the 
regularity  of  transportation  service.  The  railroad  service  in 
most  civilized  countries  furnishes  the  maximum  of  frequency 
and  regularity  in  transportation,  but  even  this  service  is  apt  to 
be  inadequate  and  irregular  in  undeveloped  territories.  Balkan 
states,  the  Far  East,  certain  Latin-American  countries  and  co- 
lonial possessions  of  various  powers  are  examples  of  this.  Fre- 
quency and  regularity  in  maritime  transport  are  of  tremendous 
importance  for  the  development  of  commerce  between  the  ex- 
porting and  the  importing  countries.  Occasional  and  irregular 
sailings  cannot  promote  commerce  between  an  exporting  country 
and  the  customer  overseas. 

Regularity  in  transportation  is  an  element  which  makes  it 
possible  for  an  exporter  to  make  definite  delivery  promises.  He 
must  have  the  assurance  that  the  goods  which  he  has  ready  for 
shipment  will  be  taken  on  board  at  a  certain  time  and  delivered 
at  the  destination  within  a  period  which  he  can  calculate  with 
some  degree  of  accuracy.  For  this  reason  regular  steamship 
lines  offer  greater  security  than  occasional  sailings  of  so-called 
tramp  boats. 


40  INTERNATIONAL  COMMERCE 

d)  The  cheapness  of  transportation  is  an  element  of  obvious 
importance.  The  post  office  furnishes  an  illustration  of  exten- 
sion of  traffic  due  to  cheapness.  The  parcels  post  in  particular 
makes  the  transportation  of  small  lots  of  goods  so  cheap  as  to 
stimulate  business  of  this  character  enormously  where  it  has  been 
introduced.  Cheapness  of  telegraph  and  cable  messages — with  the 
additional  economy  of  compressing  messages  into  a  small  num- 
ber of  words  through  the  use  of  codes — is  a  factor  in  facilitating 
international  commerce.  The  cheapness  of  transport  on  board 
of  vessels,  as  compared  with  the  dearer  but  speedier  transporta- 
tion by  railways,  is  a  factor  greatly  affecting  competitiveness 
where  waterways  and  railway  routes  serve  the  same  points.  Spe- 
cial inland  freight  rates  for  export  traffic  have  been  designed  in 
many  countries  to  add  to  the  competitiveness  of  export  mer- 
chandise. 

e)  Simplicity  of  routine.  The  reduction  to  the  minimum 
of  difficulties,  labor  and  trouble  in  international  trade  relations 
has  greatly  furthered  the  expansion  of  international  commerce. 
The  introduction  of  uniform  Bills  of  Lading,  of  through  Bills 
of  Lading  which  make  it  possible  to  convey  goods  over  a  series 
of  connecting  railways  to  the  port  of  shipment,  without  the 
multiplication  of  handling  en  route  are  illustrations. 

The  complicated  nature  of  railway  freight  rates,  the  arbi- 
trary charges  for  maritime  freights  on  the  basis  of  either  space 
or  weight  at  the  option  of  the  carrier  are  illustrations  to  the 
contrary. 

f)  Suitability  of  the  transport  media.  Finally  we  must  con- 
sider as  a  factor  furthering  international  commerce  in  the  mat- 
ter of  transportation  such  developments  in  the  equipment  of 
transport  media  as  refrigerating  devices  on  railroads  and  ocean 
vessels,  special  cars  and  specially  designed  arrangements  for 
dealing  quickly  and  effectively  with  special  classes  of  merchan- 
dise, tank  boats  for  carrying  oils,  etc. 

4.     Governmental  Influences  Affecting  the  Exchange 
of  Goods  betxveen  Countries. 

It  is  the  province  of  commercial  politics  to  examine  at 
length  the  governmental  influences  affecting  the  passing  of  mer- 


BASIC  FACTORS  ^ 

chandise  across  the  frontiers  dividing  two  sovereignties.     But  a 
cursory  view  of  these  factors  may  not  be  out  of  place  here. 

States  can  forbid  the  export,  the  import  or  the  transit  of 
specified  commodities.  These  prohibitions  may  be  temporary 
or  permanent,  conditional  or  unconditional,  general  or  limited  to 
certain  economic  subjects.  The  temporary  suspension  of  such 
prohibitions  opens  a  temporary  business  opportunity  of  which 
merchants  may  take  a  quick  advantage,  but  it  may  also  happen 
that  in  doing  so  unsound  marketing  conditions  may  result. 

Conditional  prohibitions  generally  relate  to  characteristics  of 
merchandise  that  are  not  essential,  but  that  may  make  their  in- 
troduction undesirable,  as  prohibitions  of  importation  of  dis- 
eased animals  or  meats,  or  of  articles  offending  local  ideas  of 
religion  or  morality,  or  perhaps  wrapped  into  newspapers  offend- 
ing against  local  censorship.  Conditional  prohibitions  may  be  so 
rigorously  enforced  as  to  approximate  the  virtual  exclusion  of 
certain  imports. 

Import  prohibitions  may  be  due  to  the  existence  of  a  mon- 
opoly, and  be  suspended  for  the  benefit  of  the  monopoly  licensee, 
which  may  be  the  state  or  a  private  person.  Here  the  commerce 
is  not  excluded,  but  limited.  The  limitation  may  not  even  affect 
the  volume  of  importation,  but  limit  the  marketing  to  a  single 
customer.  Nevertheless  it  is  a  factor  seriously  affecting  the  or- 
ganization and  the  machinery  of  international  commerce.  For 
these  monopolies  are  frequently  in  the  habit  of  asking  only  a 
few  sources  of  supply  for  bids,  excluding  entire  countries  and 
many  competitors  from  possibility  of  competing. 

Another  important  and  practically  universal  factor  affecting 
the  passage  of  commodities  from  one  sovereignty  to  another  is 
the  customs  tariff,  whereby  import,  export  or  sometimes  (rarely) 
transit  customs  duties  are  levied  upon  goods. 

These  customs  duties  may  have  the  aim  of  making  traffic  in 
certain  commodities  impossible.  Such  duties  are  known  as  pro  ■ 
hibitive.  Or  they  may  have  the  aim  of  rendering  the  importation 
of  foreign  goods  difficult,  for  the  purpose  of  protecting  home  in- 
dustries, and  these  are  known  as  protective,  or  a  state  may  rely 
upon  duties  levied  on  goods  passing  from  or  into  its  sovereignty 
in  order  to  raise  administrative  revenues,  and  such  duties  are 
known  as  customs  duties  for  revenue  purposes.     Duties  may  be 


42  INTERNATIONAL  COMMERCE 

levied  upon  the  quantity  or  weight  of  goods,  when  they  are 
known  as  specific  duties,  and  upon  the  value  of  goods,  when  they 
are  known  as  ad  valorem  duties. 

In  the  case  of  specific  duties  levied  upon  the  weight  of  goods, 
the  duties  may  be  based  upon  the  gross  weight,  that  is  the  weight 
of  goods  plus  the  interior  wrappings  and  the  outer  packings,  or 
upon  the  net  weight  of  goods,  or  upon  the  weight  of  goods  plus 
the  interior  wrappings  but  without  the  outer  packings.  The  dif- 
ference in  weight  between  the  net  contents  and  the  wrappings 
may  be  either  actual,  or  may  be  arbitrarily  fixed  by  law.  It  is 
in  such  cases  the  endeavor  of  the  parties  concerned  in  the  sale 
and  in  the  purchase  to  provide  packing  of  the  lightest  character 
compatible  with  the  safety  and  the  nature  of  goods.  This  en- 
deavor is  checked  by  the  right  reserved  in  the  customs  tariffs 
of  many  countries  to  calculate  the  so-called  tare  (the  weight 
of  packing)  either  on  the  basis  of  actual  weight  or  of  the  arbi- 
trary customs  regulation,  whichever  is  most  profitable  to  the 
state. 

Certain  customs  duties  must  be  considered  as  unwarranted 
impediments  to  international  commerce,  as  for  instance  import 
duties  on  samples,  catalogs,  etc.,  duties  levied  in  certain  export- 
ing countries  upon  returned  merchandise  or  empty  envelopes 
such  as  sacks,  casks,  etc. 

Customs  duties  are  an  important  factor  in  the  calculations 
of  commerce,  and  in  order  to  create  a  rational  organization  of 
business  in  given  commodities  and  with  given  markets  the  ex- 
port merchant  must  be  able  to  depend  upon  a  certain  stability 
in  such  matters.  The  export  merchant  calculates  the  market- 
ability of  his  article  in  a  given  market  on  the  basis  of  existing 
customs  duties.  He  creates  an  organization,  he  invests  a  capi- 
tal; back  of  him  the  production  or  the  manufacture  effects  a 
similar  adjustment,  and  even  a  greater  capital  investment  is  in- 
volved. Therefore  it  is  clear  that  such  an  important  factor  must 
have  some  form  of  permanency.  This  leads  to  the  conclusion 
of  commercial  treaties  beween  states.  In  many  countries  cus- 
toms tariffs  are  changed  very  frequently,  leading  to  much  in- 
security. In  some  countries  changes  are  contemplated  because 
of  impending  granting  of  monopolies,  leading  to  temporary  un- 
sound speculative  importations.     A  consequence  of  such  a  state 


BASIC   FACTORS  4."> 

of  affairs  is  found  in  unstable  prices  which  affect  business  very 
unfavorably.  An  intensified  importation  may  bring  about  an 
overburdening  of  warehousing  facilities  and  sometimes  an  actual 
crisis. 

Less  dangerous  is  this  intensified  activity  where  due  notice 
has  been  given  of  a  determined  change  in  tariff  duties  and  where 
commerce  seeks  to  adjust  itself  before  the  new  duties  go  into 
effect. 

A  customs  tariff  may  be  in  effect  for  goods  originating  in 
all  countries  on  an  equal  basis,  or  some  countries  may  have  a 
preferential  treatment.  A  veiled  method  of  affording  preferen- 
tial treatment  to  a  country  is  to  single  out  varieties  of  goods 
pre-eminently  furnished  by  one  country  and  to  base  customs 
duties  upon  varieties,  imposing  either  lighter  or  heavier  import 
duties. 

It  is  possible  also  to  maintain  a  prohibitive  attitude  to  a 
given  country  in  the  matter  of  customs  duties  without  any  ap- 
parent differentiation  between  countries,  by  subjecting  a  coun- 
try's principal  export  articles  to  specially  heavy  duties. 

Commercial  treaties  between  countries  may  exact  the  so- 
called  most  favored  nation  treatment  for  the  products  of  a  coun- 
try, in  which  case  any  preference  in  customs  tariff  matters  ex 
pressly  granted  to  one  country  becomes  automatically  effective 
for  the  goods  of  the  country  which  is  the  beneficiary  of  the  most 
favored  nation  clause. 

Some  tariffs  impose  different  duties  upon  articles  imported 
overland  and  by  seagoing  vessels.  This  may  have  the  aim  of 
promoting  the  use  of  specific  means  of  transportation,  perhaps 
in  order  to  build  up  port  activity. 

Again  some  customs  tariffs  impose  a  lighter  duty  upon  ar- 
ticles imported  by  vessels  flying  the  national  flag,  which  may 
have  the  aim  of  promoting  the  interests  of  national  mercantile 
marine,  or  of  placing  at  a  disadvantage  the  commerce  of  specified 
countries  with  which  the  national  marine  maintains  no  regular 
connections. 

In  order  to  arrive  at  the  correct  origin  of  goods,  these  coun- 
tries demand  a  certificate  of  origin,  the  obtaining  of  which  in  the 
case  of  some  countries  is  connected  with  almost  prohibitive  red 
tape. 


44  INTERNATIONAL  COMMERCE 

The  practice  of  many  countries  to  exact  heavy  fines  for 
minor  contraventions  of  frequently  complicated  and  obscure  re- 
gulations as  to  packing,  document  technique,  etc.,  imposes  on 
the  one  hand  upon  the  export  merchant  the  necessity  of  rigorous 
care,  and  presents  on  the  other  an  obstacle  to  the  smooth  devel- 
opment of  international  commerce  which  in  the  case  of  some 
smaller  states  amounts  almost  to  an  international  scandal. 

States  not  only  impede  but  can  also  promote  the  passage  of 
goods  across  their  frontiers.  Export  bounties,  which  can  be  di- 
rect or  indirect  (in  the  shape  of  tax  and  customs  duty  restitu- 
tutions)  are  granted  in  some  countries  to  promote  the  export  of 
certain  commodities.  An  indirect  export  bounty  is  a  rebate  or 
drawback  for  duties  imposed  upon  the  import  of  raw  and  semi- 
raw  products  when  worked  up  at  home  and  re-exported  in  the 
shape  of  a  manufactured  product.  In  some  countries  permis- 
sion is  granted  to  import  duty-free  a  quantity  of  raw  products 
corresponding  to  the  quantity  of  manufactured  goods  exported. 
These  licenses  may  be  either  used  by  the  licensees  or  sold  to 
others. 

Extraordinary  occasions,  such  as  the  recent  world  war,  may 
effect  a  thorough-going  temporary  control  of  exports  and  im- 
ports, for  the  purpose  of  conservation  of  materials  needed  for 
national  defense,  or  for  checking  hostile  operations,  with  the 
virtual  prohibition  of  certain  imports  and  exports  and  a  strict 
system  of  licensing  others.  The  War  Trade  Board  was  the 
medium  used  by  the  government  of  United  States  to  exercise 
this  control. 

Blockade  and  contraband  regulations  in  times  of  war  affect 
transportation  of  goods,  aiming  to  prevent  the  sinews  of  war 
from  being  delivered  into  the  hands  of  the  enemy. 

In  addition  to  duties  imposed  upon  imports  and  exports  and 
transit  of  goods  via  national  frontiers  and  sea  ports,  many  pro- 
vincial, regional  and  municipal  bodies  impose  minor  taxes  of 
local  character  on  goods  passing  across  interior  boundaries. 

Some  tariffs  exempt  from  duty  raw  products  introduced  in- 
to the  country  merely  for  the  purpose  of  improvement  or  re- 
export, or  manufactured  goods  the  basis  of  which  was  the  do- 
mestic raw  product  exported  abroad  and  re-imported  in  im- 
proved condition. 


BASIC  FACTORS  45 

Articles  sent  to  expositions  and  fairs  are  exempt  from  duty 
in  most  countries,  or  a  duty  is  collected  thereon  and  reimbursed 
on  re-export. 

Most  countries  permit  the  passage  of  goods  in  transit,  either 
in  bond,  or  otherwise,  without  charging  customs  duties. 

Some  countries  permit  the  storing  of  foreign  goods  in  the 
limits  of  a  certain  territory,  without  charging  any  customs  duties. 
This  arrangement  is  generally  carried  out  in  connection  with  a 
port,  forming  a  so-called  free  port.  Here  foreign  goods  may 
be  re-loaded  and  shipped  to  another  foreign  destination,  or  they 
may  be  withdrawn,  improved  or  unimproved  as  the  occasion 
may  demand,  and  enter  the  dutiable  territory  against  payment 
of  the  customs  duty  just  for  the  quantity  of  material  required. 

In  addition,  bonded  warehouses  permit  the  duty-free  storing 
of  foreign  merchandise  or  produce  against  a  bond,  enabling  mer- 
chants to  withdraw  commodities  as  required,  with  a  postpone- 
ment of  the  payment  of  customs  duties  or  of  consumption  taxes. 

5.    Demand  and  Purchasing  Power  as  Factors  in  the 
Development  of  International  Commerce. 

The  extent  of  the  demand  for  foreign  goods  in  the  country 
of  importation  depends  upon  many  conditions : 

Upon  the  size  of  the  population,  upon  its  natural  character- 
istics, upon  outward  natural  conditions  in  which  they  live,  upon 
their  degree  of  culture,  upon  their  economic  development,  upon 
their  intercourse  with  other  nations,  upon  their  historic  past,  and 
upon  extraneous  circumstances. 

A  people  ma}-  have  a  higher  or  a  lower  standard  of  living, 
with  varying  requirements  for  its  daily  life.  To  a  considerable 
extent  this  may  depend  upon  nature,  principally  upon  climate, 
then  upon  the  topography,  upon  vegetation,  etc.  With  increas- 
ing culture  there  comes  a  growth  of  requirements ;  with  increas- 
ing production  comes  a  demand  for  fhe  means  of  production. 
But  even  two  countries  that  may  not  differ  in  the  degree  of  cul- 
ture may  develop  different  requirements  because  of  varying 
character  of  cultural  and  economic  development :  countries  with 
a  religion  involving  high  ritual  will  need  wax  candles,  holy  pic- 
tures,   embroidered    vestments,    whereas    countries    with  a  non- 


4tj  INTERNATIONAL  COMMERCE 

ritualistic  religion  will  have  no  demand  for  these  articles.  Favor- 
able political  and  economic  conditions  may  cause  an  increase  of 
enterprise,  and  therefore  an  increased  demand  for  means  of  pro- 
duction, for  articles  of  luxury.  Unfavorable  political  conditions 
may  lead  to  an  extraordinary  temporary  demand  for  arms  and 
armaments,  for  goods  needed  in  the  restoration  of  property  des- 
troyed in  the  war.  An  important  element  is  the  degree  in  which 
the  broad  masses  of  population  participate  in  the  culture  of  the 
wealthy  classes — China,  Japan,  Russia  may  illustrate  this  point. 
Lively  intercourse  with  culturally  higher  developed  nations 
popularizes  their  manner  of  life  and  creates  a  demand  for  articles 
currently  used  by  them.  Missionaries  have  been  frequently  the 
first  to  acquaint  natives  in  various  fields  with  the  most  elemen- 
tary requirements  of  civilized  life,  leading  up  to  a  demand  for 
refinements  and  luxuries. 

These  conditions  affect  not  only  the  degree  but  also  the 
character  of  the  demand  in  importing  countries  for  foreign 
goods.  And  in  this  connection  the  tastes,  the  customs,  the  re- 
ligion, the  natural  inclinations,  the  historic  traditions,  as  well  as 
the  topographic  and  climatic  conditions  affect  this  demand,  par- 
ticularly in  such  matters  as  foodstuffs,  clothing  and  household 
goods. 

To  the  extent  that  the  economic  satisfaction  of  an  existing 
need  through  the  domestic  production  is  unattainable,  there  ex- 
ists in  a  given  market  a  demand  for  importation. 

This  may  mean  that  in  spite  of  the  existing  demand  the  do- 
mestic production  is  unequal  to  the  task  of  covering  it  fully. 
Foreign  goods  of  the  same  quality  may  be  imported  to  fill  the 
gap.  Or  the  domestic  production  may  fill  the  need  existing  for 
a  low  quality  of  products,  without  being  able  to  supply  the  higher 
quality  for  which  a  demand  exists.  And  finally,  the  domestic 
production  may  meet  the  domestic  demand  for  a  high  quality 
product,  but  not  the  demand  for  a  cheaper  and  inferior  product. 
And  in  the  matter  of  taste,  a  foreign  importation  may  meet  de- 
mands which  cannot  be  satisfied  at  home,  as  for  instance  French 
millinery  and  ladies'  apparel,  American  shoes,  so-called  Panama 
hats,  etc. 

The  importability  of  an  article  need  not  necessarily  be  lim- 
ited to  the  existing  demand.     The  existing  demand  for  importa- 


BASIC  FACTORS  4,7 

tion  merely  assures  a  market  for  a  foreign  article,  provided  the 
imported  article  can  meet  the  demand.  But  by  competition  with 
the  domestic  product  a  foreign  article  may  even  conquer  a  por- 
tion of  the  custom  which  the  domestic  product  might  legitimately 
claim.  The  exporting  merchant  must  therefore  be  acquainted 
not  only  with  the  actual  demand  for  importation,  but  with  the 
entire  potential  demand  in  a  given  market  for  a  given  article. 
He  will  therefore  not  content  himself  with  drawing  conclusions 
from  existing  conditions  as  illustrated  in  the  import  and  export 
statistics,  but  will  endeavor  to  study  for  himself  the  degree  of 
the  general  demand  for  an  article  and  the  possibilities  of  either 
increasing  it  or  perhaps  even  of  awakening  it.  And  here  the 
enterprising  merchant  will  find  his  most  promising  and  most 
difficult  prospects.  In  order  to  attain  success  here  he  must  study 
all  of  the  factors  mentioned  above  as  affecting  demand.  The 
introduction  and  the  stimulation  of  the  demand  for  illuminating 
oils  and  lamps,  of  certain  textiles,  of  sewing  machines,  type- 
writers, automobiles,  etc.,  bristles  with  the  romance  of  either 
awakening  new  needs  or  of  successfully  catering  to  existing 
needs  in  difficult  markets. 

The  buying  of  foreign  goods  to  satisfy  local  demand  pre- 
supposes the  ability  and  the  willingness  to  purchase,  in  other 
words  a  purchasing  pozver,  the  power  to  pay  to  the  foreign  ex- 
porter the  price  which  he  desires  for  his  goods. 

For  this  reason  the  actual  importations  into  a  country  do 
not  only  depend  upon  its  need  of  importations,  but  also  upon  its 
purchasing  power.  Here  considerable  variations  are  possible. 
There  are  densely  populated  countries  with  a  very  inferior  pur- 
chasing power  per  capita,  like  India  and  China,  and  countries 
with  a  slim  population  and  with  a  tremendous  purchasing  power 
per  capita,  like  Australia. 

Purchasing  power  must  be  considered  as  average  purchas- 
ing power  per  capita,  and  as  purchasing  power  in  individual  so- 
cial strata.  It  is  the  latter  which  is  of  particular  significance  as 
a  criterion  of  possibility  of  importation. 

The  more  the  purchasing  power  is  distributed  among  the 
wide  strata  of  the  population,  the  better  chances  there  are  for 
increasing  imports.  The  concentration  of  the  purchasing  power 
in  narrow  circles  will  seldom  recompense  even  by  the  increased 


48  INTERNATIONAL  COMMERCE 

average  per  capita  purchases  within  these  narrow  circles,  or  by 
the  increased  average  of  value  and  quality,  for  the  lacking  de- 
mand in  the  broader  strata.  The  more  evenly  distributed  in  the 
population  is  the  purchasing  power,  the  more  will  the  predomin- 
ating quality  of  the  imported  goods  depend  upon  the  average  per 
capita  purchasing  power  of  the  country.  Given  a  concentration 
of  the  purchasing  power  in  a  narrow  section  of  the  population, 
in  spite  of  the  average  great  wealth  of  a  country,  there  will  be 
only  a  small  importation  of  high  quality  goods,  and  the  bulk  of 
importation  will  be  in  goods  of  the  lowest  quality. 

The  purchasing  power  of  a  country  as  towards- other  coun- 
tries depends  upon  its  economic  wealth,  upon  its  income  earning 
conditions  and  upon  the  exchange  value  of  its  money. 

The  economic  wealth  of  a  country  forms  the  basis  of  its 
purchasing  power.  It  does  not  coincide  with  the  natural  wealth 
of  the  country,  that  is  with  the  wealth  of  the  country  in  natural 
resources  without  the  human  agent.  There  are  countries  of 
magnificent  natural  resources  and  of  undeveloped  purchasing 
power.  It  is  the  economic  exploitation  which  transforms  natural 
wealth  into  economic  wealth. 

Since  the  individual  uses  a  portion  of  his  earned  income  for 
the  satisfaction  of  his  needs,  not  consuming  his  capital,  it  is  the 
earning  capacity  and  the  income  derived  thereby  which  determines 
the  purchasing  power  of  a  nation.  Factors  influencing  this  are 
periods  of  economic  "booms"  and  depressions,  as  well  social 
developments  which  sometimes  transform  the  income  conditions 
of  entire  strata  of  the  population. 

Finally  the  exchange  value  of  a  country's  money  is  an  im- 
portant factor  affecting  the  purchasing  power  of  a  country  for 
articles  of  import ;  this  is  indicated  by  the  standing  of  the  coun- 
try's bills  of  exchange  in  the  international  exchange  market,  be- 
cause the  major  portion  of  international  debt  balances  is  settled 
through  bills  of  exchange  and  remittances  to  banks  equalizing 
same,  as  we  will  see  in  due  course. 

The  international  exchange  value  of  a  country's  money  may 
undergo  general  changes,  or  changes  in  relation  to  one  particular 
foreign  country.  In  the  first  instance  the  change  will  be  due  to 
alterations  in  the  economic  conditions   (as  having  occurred  or 


BASIC  FACTORS  49 

as  being  expected)  in  the  country  itself,  in  the  second  instance 
to  alterations  of  economic  conditions  in  the  foreign  country. 

If  the  international  exchange  value  of  a  country's  money 
increases,  the  purchasing  power  of  the  country  in  international 
commerce  also  increases,  for  then  the  same  amount  of  domestic 
money  can  cover  greater  quantities  of  foreign  currency.  Com- 
mercially expressed:  if  the  exchange  value  of  the  importing 
country's  money  increases,  and  the  exporter  quotes  the  same 
price  for  his  goods,  the  importer  procures  his  purchases  at  a 
smaller  outlay  of  his  domestic  money.  If  the  exporter  quotes 
in  the  currency  of  the  importing  country,  he  can  quote  lower 
prices  without  suffering  any  loss  in  his  profit,  all  other  conditions 
remaining  equal. 

The  ability  of  a  country  to  export  rises  when  the  interna- 
tional exchange  value  of  its  money  sinks,  and  at  the  same  time 
its  purchasing  power,  or  its  capacity  to  import  suffers,  all  other 
elements  remaining  equal. 

In  view  of  the  great  importance  of  international  exhange 
rates  in  all  commercial  possibilities,  it  is  the  business  of  every 
merchant  interested  in  international  commerce  to  familiarize 
himself  with  and  to  watch  all  those  conditions  which  affect  in- 
ternational exchange,  such  as  trade  balances,  national  credit, 
rates  of  interest,  important  international  capital  investments, 
international  bill  and  bullion  transfers,  economic  conditions 
which  lead  to  an  influx  of  funds  from  abroad,  etc. 

Changes  in  the  exchange  market  may  temporarily  aid  or 
hinder  international  commerce  in  a  certain  direction,  but  the 
stability  of  the  exchange  is  always  an  aid,  and  an  instability  of 
the  exchange  is  always  a  hindrance.  Exchange  stability  permits 
the  merchant  to  calculate  and  plan  his  business  transactions  with 
a  smaller  risk  margin,  encouraging  him  to  invest  more  liberally 
in  extensive  organization  or  in  manufacturing  plants  which  de- 
pend upon  international  commerce. 

Side  by  side  with  purchasing  power,  purchasing  eagerness  is 
an  element  of  some  importance.  The  factors  determining  the 
eagerness  to  purchase  are:  the  demand  for  the  foreign  article, 
the  amount  of  money  which  must  be  given  up  to  procure  it — 
the  price,  and  the  subjective  valuation  of  the  money  thus  given 


50  INTERNATIONAL  COMMERCE 

up.  The  greater  the  need,  and  the  lower  the  price  and  the  sub- 
jective valuation  of  money,  the  greater  is  the  purchasing  eager- 
ness. 

6.    Commercial  Laws  and  Usages  as  Factors  in 
International  Commerce. 

The  development  of  international  commerce  is  further  af- 
fected by  laws  prevailing  in  the  country  where  the  purchaser  is 
located,  in  the  country  where  the  seller  is  domiciled,  and  finally 
in  countries  through  which  the  goods  pass  in  transit. 

The  facility  of  commercial  intercourse  between  persons  re- 
siding in  various  countries  has  brought  about  an  international 
relationship  between  the  laws  of  different  countries  relating  to 
persons  and  obligations. 

In  many  countries  outside  of  Great  Britain  and  the  United 
States  the  laws  of  commerce  constitute  a  distinct  branch  of 
jurisprudence,  and  also  a  distinction  is  made  between  public  law 
and  private  law. 

The  public  law  of  interest  in  international  commercial  re- 
lations includes  regulations  permitting  aliens  to  settle  and  to  do 
business,  their  right  to  purchase  real  estate,  the  right  of  foreign 
traveling  salesmen  to  ply  their  occupation,  the  right  of  naviga- 
tion under  a  foreign  flag,  taxation,  customs  tariffs,  patent  and 
trade- mark  laws,  regulations  governing  specified  enterprises 
such  as  banking  and  insurance,  regulations  governing  incorpora- 
tion or  the  floating  of  stock  companies,  or  commerce  in  specific 
articles  such  as  provisions  and  liquors,  weights,  measures,  etc. 
Commercial  treaties  between  states  frequently  include  detailed 
stipulatipns  with  regard  to  the  rights  of  foreigners  under  such 
legislation. 

Private  law,  inasfar  as  it  affects  the  development  of  inter- 
national commerce,  refers  to  special  commercial  regulations,  in- 
cluding promissory  notes,  commercial  usages,  regulations  of 
autonomous  bodies  such  as  exchanges,  etc. 

In  certain  countries  aliens  are  exempt  from  local  jurisdic- 
tion and  placed  under  consular  jurisdiction,  being  subject  to  their 
national  law's.  Among  these  countries  is  China,  Persia  and  Siam. 
Turkey  until  a  short  time  before  the  war  granted  consular  juris- 
diction  to    foreigners,     japan   abolished   consular   jurisdiction 


BASIC  FACTORS  51 

only  a  few  years  ago,  and  all  foreigners  residing  in  Japan  are 
subject  to  Japanese  laws.  In  Egypt  a  mixed  European  tribunal 
hears  cases  in  which  the  rights  of  foreigners  are  involved. 

Just  and  rigorous  commercial  laws,  an  impartial  and  honest 
administration  of  same,  a  judiciary  that  is  honorable  and  compe- 
tent, the  recognition  of  proper  commercial  usages  as  binding, 
low  cost  of  litigation — these  are  elements  of  vital  importance  in 
international  commerce. 

The  international  commercial  law  is  a  development  towards 
which  a  number  of  international  congresses  have  contributed 
much  thought  and  effort.  The  rights  of  nationals  in  foreign 
countries  are  generally  safeguarded  by  commercial  treaties. 

The  prudent  international  merchant  will  realize  that  as  long 
as  there  are  possibilities  of  conflict  of  laws  his  agreements  with 
his  business  connections  abroad  should  be  in  writing,  precisely 
worded,  strictly  cafried  out  as  to  avoid  the  necessity  of  litiga- 
tion. Even  in  countries  with  somewhat  undeveloped  or  unsat- 
isfactory administration  of  justice  there  exists  a  powerful  public 
opinion  in  the  business  community  which  a  reputable  firm  will 
not  seek  to  offend. 

The  expensiveness  of  litigation,  delays  and  bad  feeling  un- 
avoidable in  connection  therewith,  and  the  difficulty  of  obtaining 
substantial  justice  in  many  foreign  places  have  led  the  com- 
mercial world  to  adopt  in  many  places  the  very  satisfactory 
method  of  settling  disputes  through  courts  of  arbitration.  Such 
courts  of  arbitration  are  organized  either  through  private  under- 
standing between  litigants  or  through  a  semi-public  body  like  a 
chamber  of  commerce  or  exchange.  The  simplicity,  celerity  and 
practically  universal  fairness  of  such  settlements  commend  the 
arbitration  method  more  and  more  to  the  commercial  world. 

In  another  place  we  will  deal  with  the  international  law  as 
affecting  the  rights  of  individuals,  firms,  corporations  in  foreign 
countries,  and  the  various  points  of  international  sales  contracts. 

7.  Official  and  Private  Promotion  of  International 
Commerce  as  a  Factor  in  its  Development. 

In  most  industrial  countries  not  only  the  government,  but 
also  the  producers  and  merchants  themeslves  recognize  the  use- 


52  INTEENATIONAL  COMMEKCE 

fulness  of  providing  auxiliary  services  for  the  promotion  of 
commerce  with  foreign  markets  such  as  private  enterprise  can- 
not provide.  It  should  not  be  the  aim  of  such  efforts  to  aid  an 
individual  business  man  in  specific  business  transactions,  but  to 
promote  the  broad  interests  of  national  trade  with  foreign  coun- 
tries, to  secure  information  of  educative  character,  to  point  out 
opportunities  abroad,  to  collect  data,  to  correct  defects,  to  pro- 
tect national  interests. 

In  the  United  States  the  interests  of  American  commerce 
in  foreign  markets  are  officially  promoted  by  the  U.  S.  Depart- 
ment of  Commerce,  and  by  the  Department  of  State.  The  De- 
partment of  Commerce  maintains  for  that  purpose  a  well  organ- 
ized section  known  as  the  Bureau  of  Foreign  and  Domestic 
Commerce,  with  headquarters  in  Washington  and  branches  in 
several  cities.  The  Department  of  State  through  its  consuls  fur- 
nishes a  very  active  service  in  promoting  American  commerce 
abroad.  The  reports  of  these  consuls  are  published  by  the  De- 
partment of  Commerce  in  Commerce  Reports.  The  Economic 
Intelligence  Section  of  the  Foreign  Trade  Adviser  Division  in 
the  State  Department  studies  all  matters  affecting  international 
commerce  but  in  no  way  duplicates  the  work  of  the  Department 
of  Commerce.  The  latter  serves  individual  business  men,  the 
former  operates  entirely  for  the  information  of  government  de- 
partments, as  will  be  pointed  out  in  our  detailed  analysis  in 
Chapter  XIX. 

Commercial  attaches,  being  diplomatic  officers  accredited  to 
several  American  embassies  abroad,  but  under  the  direction  of 
the  Secretary  of  Commerce,  and  a  staff  of  trade  commissioners 
sent  on  commercial  missions  to  foreign  markets  complete  a 
scheme  of  trade  promotion  which  in  results  attained  is  unequaled 
by  any  nation. 

National  bodies  more  or  less  directly  devoted  to  the  promo- 
tion of  America's  trade  with  foreign  countries  are  the  National 
Foreign  Trade  Council,  the  National  Association  of  Manufac- 
turers, the  American  Manufacturers'  Export  Association,  the 
Chamber  of  Commerce  of  the  United  States  of  America,  the 
Philadelphia  Commercial  Museum. 

Chambers  of  commerce  in  many  cities  in  the  United  States 
maintain    sections    paying    special    attention    to    foreign    trade. 


BASIC  FACTORS  fy 

There  are  American  chambers  of  commerce  in  several  foreign 
cities.  Many  of  the  organizations  named  maintain  information 
bureaus,  and  other  efforts  at  foreign  trade  promotion  attempted 
from  time  to  time  by  American  and  foreign  interests  comprise 
sample  warehouses,  special  and  general  expositions,  etc. 

Banks  and  trust  companies  have  added  the  foreign  trade 
promotion  feature  to  their  activities,  as  for  instance  the  Amer- 
ican Express  Company,  the  Guarantee  Trust  Company,  the  Irv- 
ing National  Bank,  the  National  City  Bank  and  others. 

A  thorough  review  of  the  activities  of  all  of  these  official 
and  private  organizations  will  be  found  in  Chapter  XIX.  We 
must  content  ourselves  here  with  merely  pointing  out  trade  pro- 
motion as  a  factor  in  international  commerce. 


CHAPTER  III. 

The  Organization  of  General  Commerce. 

i.    Merchants  as  Middlemen. 

The  development  of  international  commerce  has  called  into 
existence  a  widely  ramified  organization  of  independent  and 
semi-independent  participants  in  the  commercial  transactions  in- 
volved in  an  interchange  of  goods  between  two  countries.  The 
sphere  of  activities  of  these  participants  is  not  always  sharply 
demarcated,  for  we  find  many  of  them  combining  characteristic 
of  several  classes,  as  for  instance  commission  merchants  acting 
as  principals  and  as  agents  or  as  middlemen,  producers  acting 
as  merchants,  and  consumers,  such  as  great  plantation  and  min- 
ing enterprises  acting  as  import  merchants  for  their  own  sup- 
plies and  for  commodities  which  they  sell  to  their  employees, 
but  for  the  purpose  of  our  consideration  we  will  endeavor  to 
outline  the  characteristic  functions  of  each  class  of  participants 
in  international  commerce. 

It  will  be  well  to  precede  an  analysis  of  the  organization  of 
international  commerce  with  a  brief  review  of  the  organization 
of  general  commerce  from  the  merchandizing  point  of  view,  and 
then  proceed  to  a  study  of  the  organization  of  international  com- 
merce, reviewing  the  activity  of  these  commercial  factors  when 
performing  their  functions  in  transactions  of  international  char- 
acter. 

It  must  be  borne  in  mind,  however,  that  in  modern  export 
and  import  practice  there  has  come  about  a  somewhat  puzzling 
intertwining  of  these  functions,  as  will  be  pointed  out  when  we 
come  to  review  modern  international  merchandizing  methods, 
and  our  purpose  at  this  point  is  merely  to  analyze  the  charac- 
teristics of  each  class  of  these  independent  links  in  the  organiza- 
tion without  regard  to  the  fact  that  in  practice  there  occurs  a 
considerable  overlapping  of  these  functions. 


GENERAL  ORGANIZATION  55 

Every  person  participating  in  commercial  transactions  for 
his  own  account  is  a  trader  in  the  widest  sense  of  the  term. 
A  somewhat  stricter  application  of  the  word  trader  will  limit  it 
to  those  economic  units  who  in  the  carrying  on  of  their  enter- 
prise regularly  conclude  commercial  transactions.  This  still 
very  broad  application  of  the  word  trader  would  include  among 
others  also  producers  who  are  regularly  called  upon  to  conclude 
purchases  and  sales.  This  would  also  include  such  organizations 
as  co-operative  associations  of  consumers,  as  for  instance  Zem- 
stvos  in  Russia,  which  include  among  their  functions  the  pur- 
chase of  materials  and  machinery  for  their  members. 

But  in  the  strictest  sense  the  word  trader  or  merchant  ap- 
plies to  those  economic  units  who  make  a  business  of  carrying 
on  strictly  commercial,  transactions  for  their  own  account. 

A  middleman  in  the  widest  sense  of  the  term  is  he  who 
concludes  commercial  transactions  for  others  or  whose  activity 
brings  about  the  conclusion  of  commercial  transactions  between 
others,  without  being  a  paid  employee  of  the  principals.  This 
would  include  the  whole  range  of  commission  merchants,  agents, 
brokers  and  auctioneers.  The  last  three  classes  make  a  business 
of  concluding  commercial  transactions  in  the  name  of  other 
parties  and  are  thus  middlemen  in  the  stricter  construction  of 
the  term. 

Commission  merchants,  however,  though  they  charge  a  com- 
mission on  percentage  basis  for  their  services,  conclude  also 
largely  transactions  in  their  own  name,  assuming  obligations  like 
Traders  in  the  stricter  sense  of  the  term,  which  require  a  capital 
investment  like  those  of  ordinary  merchants,  so  that  their  posi- 
tion in  the  organization  of  commerce  more  nearly  approaches 
that  of  merchants,  and  causes  them  to  seek  in  addition  to  a  re- 
muneration on  the  basis  of  a  percentage  commission,  which  they 
receive  on  some  transactions,  a  profit  on  many  transactions  that 
corresponds  in  its  proportion  to  the  profits  of  ordinary  mer- 
chants. 

The  organization  of  commerce  includes  also  auxiliary  en- 
terprises such  as  warehousing,  shipping,  freight  forwarding,  in- 
surance, banking  and  credit  information  enterprises  whose  ac- 
tivities will  be  touched  upon  in  due  course. 


5fi  INTERNATIONAL  COMMERCE 

2.     Producers  and  Consumers. 

He  who  gains  or  brings  forth  from  natural  resources  or 
works  up  and  improves  industrially  material  products  is  called 
a  producer.  Strictly  speaking,  however,  a  producer  is  he  who 
carries  on  such  an  activity  as  an  independent  unit  and  who  be- 
comes the  owner  of  his  products.  The  producer  participates  in 
commerce  by  the  sale  of  his  products  and  by  the  purchase  of 
supplies  which  he  needs  as  means  of  production.  The  extent  of 
the  producer's  participation  in  commerce  depends  entirely  upon 
the  size  of  his  production,  and  we  must  therefore  differentiate 
between  production  on  a  small  scale  and  on  a  large  scale.  We 
have  thus  in  the  case  of  natural  products  a  differentiation  be- 
tween large  plantations,  timber  exploiting  enterprises,  cattle 
growers,  large  fisheries,  big  mining  undertakings  on  the  one  hand, 
and  small  agriculturists,  ranchers,  fishermen,  miners,  etc.  on  the 
other.  In  the  case  of  industrial  products  likewise  we  have  large 
manufacturing  enterprises  on  the  one  hand  and  small  tradesmen 
and  artizans  on  the  other. 

In  the  consideration  of  the  organization  of  international 
commerce  we  will  have  in  mind  only  those  producers  and  man- 
ufacturers whose  volume  of  production  makes  it  possible  for 
them  to  participate  in  international  transactions. 

The  commercial  transactions  of  the  large  producers  are 
characterized  by  greater  volume  than  those  of  the  small  pro- 
ducers ;  they  are  also  distinct  in  the  character  of  those  who  buy 
from  them.  Large  producers  sell  in  the  first  instance  to  the  trade 
— to  wholesale  merchants  and  to  other  producers ;  they  are  not 
limited  to  sales  in  the  locality  of  their  producing  establishments 
but  sell  to  the  trade  also  in  other  cities,  and  if  they  maintain  an 
export  organization  also  in  other  countries.  Frequently  they 
seek  to  eliminate  the  dealer  and  establish  a  retail  selling  organ- 
ization of  their  own,  opening  stores  in  various  cities,  or  they 
also  seek  to  eliminate  the  middleman  in  export,  opening  branches 
and  agencies  abroad.  The  tendency  of  eliminating  middlemen 
is  particularly  characteristic  of  large  manufacturing  enterprises. 

The  small  producer  generally  sells  locally,  and  if  his  pro- 
duction embraces  articles  of  immediate  consumption  he  sells  to 
consumers.     Where  his  production — small  as  it  is — exceeds  the 


GENERAL  ORGANIZATION  17 

demand  in  his  immediate  locality,  particularly  in  the  production 
of  industrial  raw  products  and  supplies,  he  sells  to  merchants  in 
the  vicinity  or  to  merchants'  and  manufacturers'  representatives 
who  call  on  him.  Between  the  wholesale  merchant  and  the  small 
producer  there  may  be  intermediate  links  who  buy  up  small 
quantities  of  material  from  small  producers  until  they  collect 
such  large  quantities  as  may  interest  the  wholesale  trade. 

Similarly  in  the  purchase  of  supplies  large  producers  buy 
from  other  large  producers  or  from  wholesale  merchants  in  distant 
cities  and  even  abroad,  while  the  small  producer  is  to  some  ex- 
tent dependent  upon  sources  of  supply  nearer  at  hand,  or  buys 
at  a  distance  when  his  wants  arc  catered  to  by  traveling  sales- 
men calling  on  him. 

The  volume  of  operations  characterizing  the  large  producers 
requires  frequently  an  extensive  commercial  selling  and  purchas- 
ing organization  and  thus  they  acquire  the  character  of  mer- 
chants in  addition  to  that  of  producers. 

In  certain  countries  producers  unite  into  combines  for  the 
increase  of  commercial  efficiency,  without  losing  their  indepen- 
dent character.  Such  combinations  have  been  frowned  upon  by 
the  spirit  of  American  laws,  being  considered  in  restraint  of 
trade.  Where  permitted,  the  combines  have  either  the  aim  of 
effecting  economies  in  buying  or  in  securing  advantages  over 
their  domestic  or  foreign  competitors  in  selling.  This  has  been 
the  policy  of  German  kartells  and  syndicates.  Combinations 
of  producers  in  America  must  be  free  from  the  taint  of  res- 
traint of  trade.  Thus  they  may  unite  informally  in  employing  a 
common  set  of  traveling  salesmen  abroad,  or  establishing  com- 
mon warehouses  at  home  or  abroad,  or  in  undertaking  other 
steps  for  the  promotion  of  their  export  trade  under  the  recently 
enacted  Webb-Pomercne  bill. 

The  participation  of  the  consumer  in  commerce  was  already 
indicated  in  considering  the  producer  as  buyer  of  supplies  needed 
in  his  production.  Here  the  producer  appears  in  the  capacity  of 
a  consumer.  A  vast  variety  of  commercial  enterprises  must 
make  purchases  for  their  own  consumption,  and  where  this  is 
large,  they  buy  from  producers  or   from  the  wholesale  trade 


58  INTERNATIONAL  COMMEEOE 

Consumers  in  many  places  have  formed  co-operative  organiza- 
tions which  appear  as  large  buyers  of  raw  and  manufactured 
products  in  behalf  of  their  members. 

3.     Merchants  Trading  for  Own  Account. 

The  trader  or  merchant  in  the  strictest  construction  of  the 
term  buys  and  sells  goods  on  which  he  has  effected  no  essential 
improvements  or  alterations.  The  sale  does  not  always  follow 
the  purchase.  Occasionally  the  sale  is  effected  first  and  the  pur- 
chase follows.  It  may  be  that  the  merchant  has  an  unusual  sell- 
ing opportunity  which  he  takes  advantage  of  in  the  hope  or  in 
the  knowledge  that  he  can  procure  the  goods  in  time  to  effect 
delivery.  This  may  be  a  matter  of  speculation,  if  the  merchant 
effects  the  sale  in  the  hope  that  he  may  secure  goods  at  a  price 
lower  than  the  sales  price  before  delivery  to  his  customer,  or  a 
matter  of  ordinary  commercial  prudence  in  case  he  does  not 
wish  to  assume  the  risk  of  buying  goods  without  the  assurance 
of  a  profitable  selling  opportunity.  He  must  have,  however,  the 
assurance  of  quotations  and  deliveries  by  a  producer,  or  he  may 
effect  his  sale  conditionally,  as  is  done  in  the  case  of  indent  busi- 
ness. 

In  accordance  with  the  volume  of  individual  transactions  the 
merchant   may  be  a  wholesale   merchant   or   a   retail  merchant. 
A  retail  merchant  generally  has  a  shop  or  a  store  where  the  in- 
dividual consumer  appears  as  a  buyer.     Or  he  may  even  be  an 
itinerant  vendor  or  peddler.    In  communities  where  retail  selling 
establishments  are  few  and  far  between  this  itinerant  vendor  per- 
forms a  necessary  function ;    otherwise  he  appears  as  a  com- 
petitor  of    retail   establishments,    and  in  view    of  his  small  ex- 
penses, his  solicitations  at  the  consumer's  place  of  residence  and 
his  generally  lower  responsibility,  he  appears  as  an  economically 
harmful  link  in  the  commercial  organization  from  the  point  of 
view  of  established  trade  cultivating  a  regular  business.     In  in- 
ternational commerce  the  peddler  crops  up  sometimes  as  a  cus- 
tomer of  dubious  desirability,  and  exporting  manufacturers  have 
often  had  unpleasant  experiences  with  Syrian  and  Turkish  ped- 
dlers operating  in  commercially  undeveloped  sections  of  Mexico, 
Hayti  and  other  countries. 


GENERAL  ORGANIZATION  56 

The  retail  character  of  the  business  of  a  store  is  not  al- 
together dependent  upon  the  volume  of  business  transacted 
therein.  The  immense  department  stores,  and  retail  stores  form- 
ing units  in  a  chain  of  stores  are  retail  establishments  only  in 
the  character  of  their  sales  to  individuals ;  from  the  point  of 
view  of  purchasing  they  are  enterprises  of  wholesale  merchants. 

In  the  organization  of  commerce  there  is  also  encountered 
in  certain  countries  the  so-called  caravan  trade,  which  is  itinerant 
vending  between  communities.  Caravan  trade  is  frequently  a 
barter  trade.  Here,  too,  the  trade  may  be  either  wholesale  or  re- 
tail, and  frequently  a  combination  of  both. 

Wholesale  and  retail  selling  may  be  combined  in  the  same 
enterprise,  in  different  departments. 

Wholesale  merchants  may  limit  their  business  to  a  certain 
merchandise  or  class  of  merchandise,  or  handle  a  very  wide  range 
of  products.  Specializing  wholesalers  generally  do  a  domestic 
business,  or  an  international  business  with  countries  that  are  well 
developed  commercially.  While  the  retail  merchant  regularly 
buys  first  and  sells  from  stock,  wholesale  merchants  frequently, 
as  already  pointed  out,  sell  first  and  cover  their  requirements 
afterwards.  But  as  a  rule,  particularly  where  they  specialize  in 
certain  classes  of  merchandise,  they  maintain  wholesale  stocks 
and  sell  a  great  deal  from  stock.  In  the  export  trade,  however, 
particularly  where  a  wide  range  of  products  is  handled,  the  rule 
is  to  carry  on  business  without  a  stock  of  merchandise. 

In  certain  oversea  products  a  number  of  wholesale  merchants 
are  linked  together  in  the  business  of  distribution.  We  may  have 
a  native  wholesale  merchant  overseas,  an  exporter  in  the  over- 
sea exporting  center,  an  importer  in  the  United  States  or  in 
Europe  and  a  wholesale  merchant  distributing  the  product  in 
the  United  States  or  in  Europe.  The  middle  links  in  such  oper- 
ations generally  represent  the  highest  degree  of  international 
commercial  activity,  while  the  outer  links  are  less  active  inter- 
nationally. 

The  wholesale  merchant  intervenes  between  the  manufac- 
turer or  producer  on  the  one  hand  and  the  retail  dealer  on  the 
other.  He  is  thus  a  middleman.  The  advantages  of  such  middle- 
men, as  well  as  of  commission  merchants  and  agents  as  middle- 


60  INTERNATIONAL  COMMERCE 

men,  will  be  discussed  in  detail  in  our  review  of  export  activities. 
These  advantages  are  practically  the  same  in  the  general  organ- 
ization of  commerce,  that  is  between  the  manufacturer  and  the 
inland  retail  trade ;  briefly  summarized  they  are :  the  possibility 
of  concentrating  resources  upon  the  item  of  production  and  ef- 
ficiency, the  diminution  of  business  risk,  the  possibility  of  spe- 
cializing and  standardizing,  the  reduction  of  merchandizing  ex- 
pense, better  terms  of  payment  which  a  wholesale  buyer  can  offer 
to  the  manufacturer,  a  quicker  turnover,  and  the  assumption  of 
speculative  risks  by  the  wholesaler  instead  of  the  manufacturer. 
Nevertheless  manufacturers  frequently  seek  to  go  around  the 
wholesaler  in  order  to  benefit  by  the  higher  prices  possible 
through  the  elimination  of  the  middleman. 

4.    Commission  Merchants  and  Agent. 

Commission  merchants  and  agents,  called  in  Great  Britain 
"mercantile  agents,"  are  middlemen  in  the  broad  sense  of  the  term. 
They  come  closer  to  traders  than  any  other  middlemen.  They 
are  to  a  large  extent  independent  traders  inasmuch  as  they  con- 
clude commercial  transactions  largely  in  their  own  firm  name 
and  require  the  prestige  and  capital  of  regular  merchants.  In 
fact,  inasmuch  as  the  commission  merchant  frequently  finances 
oversea  business,  he  requires  a  greater  capital  than  a  domestic 
merchant  who  frequently  enjoys  credit  favors  from  the  manufac- 
turer and  sells  to  his  trade  on  short  terms.  For  this  reason  com- 
mission business  is  very  largely  combined  with  business  for  the 
firm's  own  account. 

A  commission  agent  is  he  who  in  his  own  name  concludes  ; 
buying  and  selling  transactions  for  the  account  of  his  commis- 
sion  principal. 

The  commission  agent  may  be  instructed  by  his  principal  to 
buy  merchandise  for  his  account. 

The  commission  to  sell  is  executed  by  the  agent  undertak- 
ing to  secure  orders  for  the  supply  of  goods,  generally  on  the 
basis  of  samples  and  catalogs,  or  to  sell  goods  shipped  him  by 
his  principal.  The  latter  method  is  known  as  selling  on  con- 
signment, the  principal  being  the  consignor  and  the  commission 
agent  the  consignee. 


GENERAL  ORGANIZATION  61 

Consignments  may  be  sent  occasionally  as  single  lots,  or  the 
agent  may  be  entrusted  with  a  consignment  stock  which  is  cur- 
rently replenished. 

The  commission  agent  may  combine  his  activity  as  buyer  on 
commission  with  that  of  selling  on  commission,  provided  he  pre- 
serves the  interests  of  his  principals  on  either  side. 

The  commission  agent  concludes  transactions  in  his  own 
name,  and  he  alone  is  responsible  to  the  third  contracting  pari}-, 
whether  he  mentions  the  name  of  his  principal  or  not.  He  can 
assume  part  or  all  the  risk  involved  in  selling  to  his  trade,  for 
which  he  charges  his  principal  a  commission  known  as  del  cre- 
dere commission. 

While  concluding  business  in  his  own  name,  the  commission 
merchant  operates  for  the  account  of  his  principal.  He  must 
inform  his  principal  correctly  of  the  price  on  the  basis  of  which 
he  concludes  business  transactions  with  third  parties. 

His  remuneration  is  found  in  the  so-called  "commission," 
on  the  basis  of  a  percentage.  In  the  case  of  a  buying  commis- 
sion the  percentage  is  generally  figured  on  the  buying  value  plus 
buying  expenses,  in  the  case  of  a  selling  commission  on  the  sell- 
ing price  before  addition  of  selling  expenses. 

5.    Selling  Agents  and  Representatives. 

A  selling  agent  or  representative  is  contractually  entrusted 
by  one  or  more  principals,  who  may  be  manufacturers  or  mer- 
chants, with  the  task  of  regularly  mediating  and  concluding 
sales  for  them.  The  characteristic  of  a  selling  agent  is  the  per- 
manent arrangement  for  a  specified  time  and  a  specified  terri- 
tory. 

As  a  matter  of  fact,  arrangements  between  agents  and  prin- 
cipals cover  the  widest  range  of  variety.  The  agent  may  main- 
tain a  small  office  and  depend  upon  his  own  efforts  in  business 
getting,  or  he  may  have  a  large  sales  organization.  He  may  re- 
present one  principal  solely  and  devote  himself  to  the  promo- 
tion of  the  sales  of  his  principal's  products  in  a  limited  territory 
or  have  a  broadcast  commission. 

Or  he  may  combine  a  number  of  so-called  non-conflicting 
lines  either  for  a  limited  territory  or  for  the  entire  export  field. 


62  INTERNATIONAL  COMMERCE 

In  international  commerce  agents  are  generally  located  in  the 
export  centers,  preferably  at  the  port  of  shipment ;  or  they  may 
be  located  abroad,  generally  in  the  import  centers  and  preferably 
in  the  ports  of  entry.  Agents  may  be  nationals  of  the  country 
of  export  or  nationals  of  the  country  of  import  or  other  for- 
eigners. 

The  agent  is  generally  remunerated  on  the  basis  of  a  per- 
centage of  sales  effected,  and  it  is  frequently  provided  in  con- 
tracts that  if  the  sales  exceed  a  certain  annual  turnover  a  graded 
extra  remuneration  is  granted  to  him.  In  many  cases  the  agent 
receives  an  allowance  for  expenses  and  even  a  stipulated  annual 
salary  or  retainer. 

A  buying  agent  stands  in  the  same  relation  to  his  principal, 
but  his  activity  is  directed  to  the  purchase  of  goods  in  behalf  of 
principals  located  too  far  from  the  source  of  production  to  be 
able  to  take  advantage  of  favorable  buying  opportunities  or  to 
examine  and  to  select  suitable  goods.  Thus  in  exporting  coun- 
tries buying  agents  make  purchases  in  behalf  of  principals 
located  in  the  importing  countries.  In  America  and  in  Europe 
buying  agents  make  purchases  in  behalf  of  principals  located 
in  South  America,  the  Far  East  or  Australia.  And  there  are 
buying  agents  for  American  and  European  firms  who  purchase 
tobaccos,  cocoanuts,  bean  oil,  copra,  toys,  silks,  etc.,  where  these 
are  produced. 

The  agents  generally  have  a  power  of  attorney  in  behalf  of 
their  principals  and  conclude  business  in  their  name.  It  is  the 
agent  generally  who  sends  invoices  to  customers.  If  he  is  located 
in  the  exporting  country  and  at  the  port  of  shipment,  he  attends 
to  the  shipping  formalities.  If  he  is  located  in  the  territory 
where  the  customer  resides,  it  is  his  duty  to  furnish  regular  re- 
ports to  his  principal,  both  with  regard  to  market  conditions  and 
to  the  standing  of  individual  customers.  The  buying  agent 
may  be  commissioned  to  accept  goods  in  behalf  of  his  principals, 
to  render  payment  for  same,  to  make  claims  for  defective  goods, 
shortage,  etc.  The  selling  agent  in  some  cases  may  also  accept 
goods  and  pass  them  on  to  customers,  receive  payments  in  be- 
half of  his  principal  and  represent  him  in  case  of  litigation. 

The  traveling  salesman  is  an  actual  employee  of  his  prin- 
cipal, generally  limited  to  the  representation  of  one  firm,  unless 


GENERAL  ORGANIZATION 

several  firms  in  non-competing  lines  combine  in  appointing  one 
traveling  salesman. 

6.    Brokers  and  Auctioneers. 

Our  consideration  of  the  functions  of  various  independent 
and  semi-independent  agencies  in  the  organization  of  general 
commerce  is  concluded  with  a  brief  review  of  the  functions  of 
brokers  and  auctioneers. 

A  broker  is  a  middleman  who  mediates  the  conclusion  of 
contracts  between  two  parties  without  maintaining  a  permanent 
contractual  relation  to  either,  or  without  being  the  agent  of 
either.  There  are  varieties  of  brokers  in  respect  to  the  subject 
of  their  activity :  there  are  commodity  brokers,  such  as  cotton, 
coffee,  textiles,  chemicals,  etc.,  and  brokers  specializing  in  pro- 
duce or  in  manufactured  goods  of  various  kinds;  there  are  bill 
and  exchange  brokers,  freight  brokers,  insurance  brokers,  ship 
brokers. 

Theoretically  it  is  not  the  original  function  of  a  broker  to 
conclude  contracts,  but  merely  to  bring  two  parties  together  and 
to  notify  either  of  the  other  party's  desire  to  conclude  a  con- 
tract. Commercial  usages,  and  in  many  countries  official  re- 
gulations govern  the  activity  of  brokers.  The  broker  is  con- 
cerned merely  in  individual  transactions  and  receives  his  re- 
muneration in  the  shape  of  a  brokerage,  but  he  bears  his  own 
expenses.  In  the  United  States  the  activity  of  the  broker  is 
principally  limited  to  exchange  and  banking  transactions  and 
to  produce.  Individual  importers  may  have  a  variety  of  produce 
to  dispose  of,  which  may  make  it  necessary  to  make  such  offers 
to  a  number  of  prospective  customers,  and  it  is  the  business  of 
brokers  to  be  familiar  with  offerings  and  demands  in  their  ter- 
ritory ;  they  generally  have  an  established  clientele,  while  neither 
the  importer  nor  the  prospective  buyer  may  have  the  necessary 
knowledge  or  the  time  to  canvass  the  market. 

The  auctioneer,  as  the  name  implies,  concludes  selling  con- 
tracts on  the  occasion  of  auctions.  Far  more  frequently  than 
in  the  United  States,  produce  of  various  kinds  is  disposed  of 
by  means  of  auctions  in  European  countries  and  in  many  for- 
eign sales  centers. 


CHAPTER  IV. 

The  Organization  of  International  Commerce. 

General  Remarks. 

In  considering  the  organization  of  international  commerce 
the  plan  is  pursued  of  treating  the  organization  of  the  export 
trade  in  the  exporting  country,  the  commercial  connections  be- 
tween the  exporting  country  and  the  importing  country,  and  the 
organization  in  the  importing  country.  The  organization  of  the 
import  trade  is  treated  in  exactly  the  same  manner. 

It  must  not  be  understood,  however,  that  the  international 
exchange  of  merchandise  is  throughout  considered  first  from  the 
viewpoint  of  the  shipping,  and  then  from  that  of  the  receiving 
country.  Such  a  procedure  would  be  entirely  too  cumbersome, 
and  moreover  would  make  it  very  difficult  to  demonstrate  and 
to  realize  the  characteristics  of  international  commerce. 

The  differentiation  between  the  export  and  the  import  trade 
is  made  by  accepting  certain  countries,  such  as  United  States 
and  the  manufacturing  countries  of  Western  Europe,  as  export- 
ing countries,  and  the  goods  shipped  from  those  countries  to 
markets  purchasing  the  bulk  of  their  manufactured  goods  from 
abroad  as  exports;  whereas  goods  imported  into  United  States 
and  into  Western  Europe  from  these  latter  markets,  being  chief- 
ly natural  products,  are  considered  as  imports,  and  the  organ- 
ization of  the  import  trade  is  then  reviewed  along  the  same  lines 
as  the  organization  of  the  export  trade. 

This  gives  us  then  the  following  schematic  outline  of  study : 

I.    The  Organization  of  the  Export  Trade. 

A.  The  organisation  in  the  exporting  country. 

B.  The  commercial  connections  between  the  exporting 

and  the  importing  country. 

C.  The  organisation  in  the  importing  country. 
(Illustrating   exports   of   manufactured    goods    from   exporting 
countries  such  as  United  States,  Great  Britain,  Belgium,  Ger- 


EXPORTERS  CLASSIFIED  86 

many,  etc.,  to  South  America,  China,  Japan,  India  and  other 
chiefly  importing  markets.) 

II.    The  Organization  of  the  Import  Trade. 

A.  The  organization  in  the  exporting  country. 

B.  The  commercial  connections  between  the  exporting 

and  the  importing  country. 

C.  The  organization  in  the  importing  country. 
(Illustrating  imports  into  the  United  States,  Great  Eritain,  Bel- 
gium, Germany  from  South  America,   India,  China  and  other 
countries  shipping  natural  products  to  manufacturing  countries.) 


I.    The  Organization  of  the  Export  Trade. 

a.    the  organization  in  the  exporting  country. 

i.    Exporters,  Commission  Merchants  and  Agents. 

The  exporter  in  the  widest  sense  of  the  term  furnishes 
goods,  or  causes  goods  to  be  furnished,  which  are  shipped  out 
of  the  country  in  which  he  carries  on  his  business ;  he  acts 
either  for  his  own  account  or  for  the  account  of  another ;  and 
his  activity  involves  rights  and  obligations  towards  third  parties 
located  abroad,  in  the  country  of  import,  or  an  account  relation- 
ship with  his  own  branch  establishment  located  abroad,  in  the 
country  of  import. 

In  this  sense,  if  goods  are  sold  and  delivered  in  the  home 
country  to  an  attorney  of  a  foreign  customer,  and  are  paid  for 
in  the  home  country,  the  transaction  involved  is  not  properly  an 
export  transaction,  even  if  the  goods  are  eventually  shipped  out 
of  the  country,  for  no  rights  or  obligations  to  parties  located  in 
the  direction  of  export  are  involved. 

More  strictly  speaking  an  exporter  is  a  merchant  who  cul- 
tivates the  sale  and  the  shipping  of  the  products  of  his  home  land 
to  foreign  countries  either  exclusively  or  as  a  prominent  part 
of  his  business. 

Among  exporters  we  must  distinguish  two  types : — the  first 
type  includes  producers  or  wholesale  merchants  exporting  some 
special  product  or  class  of  products,  but  doing  largely  a  do- 


66  INTERNATIONAL  COMMERCE 

mestic  business  and  catering  to  export  as  a  side  issue.  Exporters 
of  this  type  ordinarily  sell  in  those  markets  where  the  business 
does  not  offer  much  greater  difficulties  than  the  home  market. 
The  second  type  includes  merchants  doing  an  export  business 
exclusively,  and  with  whom  the  class  of  goods  handled  is  a  sec- 
ondary consideration.  Such  exporters,  if  their  market  requires 
fertilizers,  will  sell  fertilizers;  or  they  will  sell  machinery,  or 
oils,  or  chemicals,  or  textiles,  or  iron  and  steel,  or  ammunition. 
The  exporter  of  the  first  type,  if  he  is  a  wholesaler,  generally 
keeps  a  stock  of  goods  from  which  he  sells,  or  if  he  is  a  pro- 
ducer, will  either  sell  from  stock  or  manufacture  goods  to  order. 
The  exporter  of  the  second  type  as  a  rule  keeps  no  stock;  the 
variety  of  goods  handled  by  him  precludes  that,  though  he  may 
keep  stocks  abroad,  where  he  may  have  developed  a  constant 
trade  in  some  staple  articles.  His  legitimate  field  of  activity  is 
in  the  markets  where  the  general  run  of  manufacturers  and 
wholesalers  find  marketing  conditions  too  difficult  for  independ- 
ent operations.  Because  of  the  range  of  products  handled  by 
him,  the  exporter  of  the  second  type  described  here,  is  termed 
in  United  States  a  general  exporter.  In  Great  Britain  he  is  called 
a  merchant  shipper. 

The  producer  whose  goods  are  exported  may  carry  on  his 
export  business  through  his  own  organization,  which  method  of 
doing  busines  is  known  as  direct  exporting,  or  through  middle- 
men or  commission  merchants,  which  is  termed  indirect  export- 
ing. 

Among  producers  a  well-established  manufacturer,  with  a 
permanent  and  profitable  home-trade  and  adequate  working  capi- 
tal, is  best  fitted  to  do  direct  exporting. 

We  may  roughly  divide  the  field  of  export  into  a  few 
groups :  the  Western  European  group  ;  the  Near  East ;  Russia ; 
Canada;  Mexico;  West  Indies  and  Central  America;  South 
America;  the  Far  East,  writh  Dutch  East  Indies  and  India; 
Australia  and  Africa. 

It  is  rational  to  suppose  that  in  his  attempts  to  do  a  direct 
export  business  the  manufacturer  will  first  turn  his  attention  to 
markets  close  at  hand,— the  American  manufacturer  to  Canada, 
Mexico,  Cuba;   the  German,  French,  Belgian,  British  manufac- 


EXPORTERS  CLASSIFIED  «7 

turers  to  European  countries,  then  the  Near  East,  North  Africa, 
etc. 

The  American  manufacturers  are  familiar  with  the  Can- 
adian market;  connections  between  United  States  and  Canada 
are  very  good ;  moreover,  the  language  spoken  in  both  countries 
is  the  same;  as  the  result,  the  Canadian  business,  but  for  the 
obstacle  of  the  customs  tariffs  which  has  induced  many  Amer- 
ican manufacturers  to  establish  branches  in  Canada,  is  considered 
by  American  manufacturers  almost  in  the  nature  of  a  domestic 
business.  The  need  of  middlemen  for  doing  business  with  Can- 
ada is  not  greatly  felt. 

Similarly  European  manufacturers  treat  the  Western 
European  market.  They  can  cultivate  it  with  only  a  little  more 
trouble  than  the  home  market. 

The  more  distant  the  market,  the  more  difficult  the  market- 
ing conditions,  the  more  readily  does  the  manufacturer  turn  to 
the  mediation  of  export  merchants.  But  as  their  export  sales 
in  a  particular  foreign  market  develop,  manufacturers  lose  their 
terror  of  distance  and  of  difference  in  language  and  conditions, 
and  if  their  output  warrants  it,  they  commence  to  work  even 
with  oversea  markets  by  means  of  their  own  selling  organiza- 
tion. 

The  opening  of  branches  abroad,  the  employment  of  re- 
gularly despatched  traveling  salesmen  to  foreign  markets  will  be 
found  a  paying  proposition  only  for  large  manufacturers.  "Small 
manufacturers  will  find  the  outlay  prohibitive  as  compared  with 
results  obtained.  There  is  no  reason,  however,  why  several 
smaller  manufacturers  in  non-competing  lines  cannot  combine 
and  instal  an  export  organization  equitably  promoting  their  in- 
terests and  minimizing  the  expense  for  each  participant,  pro- 
vided the  interests  of  each  are  adequately  promoted. 

Modern  methods  of  publicity,  through  the  use  of  export 
journals  and  circularization,  as  well  as  suitable  agency  arrange- 
ments, may  also  build  up  an  appreciable  volume  of  direct  trade 
for  smaller  manufacturers  at  a  very  slight  expense,  if  good 
judgment  is  used. 

Certain  products  are  preferably  sold  through  exporters; 
these   are   agricultural   produce,   cattle,   timber,   cooperage,    etc. 


OS  INTERNATIONAL  COMMERCE 

Manufactured  goods  are  more  suitable  for  the  direct  exporting 
by  producers. 

General    exporters    seldom    cultivate    markets    with    which/ 
manufacturers  can  do  a  direct  business  without  much  trouble. 
So  we  find  few  general  exporters  in  the  United  States  who  make 
a  specialty  of  Canada  or  Great  Britain;    few  general  exporters 
in  Germany  who  cultivate  European  markets. 

General  exporters  seldom  limit  themselves  to  special  classes 
of  merchandise.  But  the  specialization  tendency  in  business  re- 
lations between  exporting  and  importing  countries  has  led  to  the 
creation  of  exporting  firms  specializing  in  machinery  and  en- 
gineering supplies,  in  textiles  or  chemicals  or  foodstuffs,  and 
even  in  many  general  export  houses  the  necessity  of  technical 
knowledge  has  led  to  the  creation  of  departments  devoted  to 
special  selected  lines  in  addition  to  departments  to  which  the 
care  of  special  markets  is  assigned. 

General  exporters,  as  stated  above,  do  not  as  a  rule  exclude  \/ 
any  merchandise  from  the  scope  of  their  activity.  Handling  a 
wide  range  of  products  they  are  in  a  position  to  cultivate  in- 
tensely markets  in  which  a  single  line  would  not  produce  a  suf- 
ficient turnover,  and  they  are  therefore  willing  to  take  on  new 
and  untried  lines.  Their  activity  presupposes  rather  a  knowl- 
edge of  markets  than  of  classes  of  merchandise.  But  general 
exporters  frequently  limit  their  operations  to  special  markets  in 
which  they  have  an  efficient  sales  organization  or  suitable  con- 
nections, though  a  few  of  them  have  developed  into  the  status 
of  world  merchants,  covering  practically  the  entire  world  with 
their  organization. 

The  general  exporter  may  be  either  a  merchant  for  own  "V 
account  or  a  commission  merchant,  or  a  combination  of  both. 
Most  export  merchants  are  substantially  commission  merchants, 
being  principally  commissioned  to  buy.  They  receive  and  solicit 
orders  from  customers  abroad  to  buy  goods  of  the  exporting 
country.  Even  where  they  have  branches  of  their  own  abroad, 
the  activity  of  these  branches  is  in  the  direction  of  procuring 
orders  to  buy.  The  acceptance  of  such  orders,  even  if  business 
is  done  for  the  account  of  the  exporter,  implies  a  commission 
to  purchase  goods. 

On  the  other  hand  exporters  often  are  also  entrusted  by 


BXPOBTEBS  CLASSIFIED  69 

producers  with  the  task  of  selling  their  goods  in  specified  for- 
eign markets.  It  is  for  this  reason  that  general  exporters,  even 
where  they  buy  and  sell  for  their  own  account,  are  also  called 
export  commission  merchants. 

Where  the  general  exporter  buys  and  sells  for  his  own  ac- 
count, the  acceptance  of  an  order  to  buy  goods  is  a  contract  for 
delivery  of  goods.  In  order  to  eliminate  risk  in  the  matter  of 
prices,  the  exporter  can  accept  such  orders  only  when  he  has 
firm  quotations  from  producers.  He  therefore  sells  first  and 
buys  afterwards,  on  the  basis  of  quotations  supplied  him  by  a 
producer.  But  when  he  maintains  branch  establishments  of  his 
own  abroad  and  has  a  current  trade  in  certain  staple  articles,  he 
may  also  purchase  goods  first  and  ship  them  to  his  branch  to  be 
sold,  without  previous  specific  orders  from  customers.  This  is 
done  particularly  in  cases  where  his  branch  establishment  abroad 
is  also  doing  a  retail  business,  or  where  that  branch  establish- 
ment deals  with  retailers  who  like  to  buy  from  stock,  not  wish- 
ing to  place  their  purchases  on  the  regular  import  conditions. 

Carrying  on  business  for  his  own  account,  the  general  ex- 
porter is  in  a  position  to  utilize  to  the  fullest  extent  his  knowl- 
edge of  market  conditions  and  his  commercial  activity  for  his 
own  profit.  Considering  the  great  risks  the  exporter  runs  in 
financing  foreign  business  with  oversea  markets  and  the  unusual 
difficulties  in  dealing  with  certain  markets,  it  is  clear  that  the 
exporter  has  the  desire  to  secure  greater  earnings  than  offered 
by  the  usual  purchasing  commission  of  5%.  On  the  basis  of 
this  commission  he  could  increase  his  earnings  only  through  im- 
proper acts,  such  as  securing  discounts  from  the  producer  which 
do  not  appear  on  the  invoice.  To  secure  greater  earnings  le- 
gitimately, he  must  appear  towards  the  customer  who  gives  him 
an  order  as  a  merchant  for  his  own  account, -though  this  does 
not  essentially  alter  the  fact  that  this  business  is  a  commission 
business,  he  being  commissioned  by  his  customer  to  buy.  For 
this  reason  the  tendency  among  commission  merchants  is  always 
in  the  direction  of  operating  for  their  own  account. 

Another  reason  why  the  general  exporter  prefers  to  act  for 
his  own  account  rather  than  strictly  on  commission  basis  is  that 
frequently  the  customer  desires  to  receive  a  quotation  for  goods 
as  delivered  and  in  the  currency  of  his  own  country  and  the  ex- 


70  INTERNATIONAL  COMMERCE 

porter  must  secure  himself  against  fluctuations  of  exchange  and 
in  speculative  items  such  as  freight  and  insurance.  This  he  can 
do  by  quoting  his  own  prices  which  include  allowances  for  such 
fluctuations,  but  in  the  strict  commission  business  on  the  basis 
of  a  percentage  commission  fee  he  is  not  authorized  to  make 
arbitrary  allowances  for  such  items. 

When  not  acting  for  his  own  account,  the  exporter  is  a  buy- 
ing agent  on  commission  basis.  His  remuneration  then  consists 
of  a  buying  commission,  which  is  a  percentage  fee.  In  order 
to  exercise  control  over  his  activity,  his  oversea  principals,  par- 
ticularly European  firms  located  overseas,  demand  from  him 
paid  original  invoices,  and  in  the  case  of  current  business  the 
right  to  examine  his  books. 

A  difference  in  his  relations  to  his  principals  who  commis- 
sion him  to  purchase  goods  is  to  be  noted  according  to  whether 
the  commission  is  limited  to  the  purchase  of  single  lots  of  goods 
or  involves  a  standing  account  current  relationship,  on  the  basis 
of  a  credit  opened  in  favor  of  the  commission  merchant.  He 
is  in  the  latter  case  assured  the  business  of  his  principal,  in  fact 
it  is  frequently  customary  for  a  foreign  firm  to  bmd  itself  con- 
tractually to  place  its  purchases  in  the  exporting  country  solely 
through  a  specified  general  exporter. 

The  exporter  may  also  act  as  commissioned  to  sell.  He 
may  either  accept  goods  on  consignment  from  producers  or  at- 
tempt to  secure  sales  for  his  principals.  The  first  is  done  in  the 
case  of  general  exporters  who  have  branches  of  their  own 
abroad,  and  while  that  method  has  much  to  commend  it,  because 
the  buyer  abroad  can  obtain  immediate  possession  of  the  goods, 
American  manufacturers  do  not  favor  a  consignment  business, 
and  it  is  usual  only  in  staple  articles  for  which  there  is  a  cur- 
rent demand.  Or  the  exporter  may  receive  samples  and  cata- 
logs and  solicit  business  abroad  for  a  special  product  for  which 
he  receives  a  selling  commission  from  the  producer.  The  gen- 
eral exporter  is  not  as  a  rule  keen  to  enter  into  such  an  arrange- 
ment with  a  producer.  He  is  willing  to  do  so  only  in  the  case 
of  important  manufacturers,  whose  business  he  is  anxious  to 
secure,  but  who  desire  to  control  the  prices  obtained  from  the 
buyers  abroad. 


EXPORTERS  CLASSIFIED  71 

Occasionally  the  export  commission  merchant  receives  a 
commission  both  from  the  seller  and  the  buyer. 

It  is  the  business  of  the  general  exporter  not  only  to  nego- 
tiate business  transactions  with  customers  abroad,  but  also  to 
finance  them.  For  this  reason  he  pays  the  producer  generally 
within  thirty  days,  or  against  documents,  but  grants  to  the  buyer 
the  credit  terms  required  by  him,  and  as  a  commission  merchant 
he  undertakes  the  so-called  del  credere  or  guarantee  of  the  ac- 
count. 

For  this  reason  the  agency  feature,  whether  as  seller  or  as 
buyer,  does  not  generally  enter  into  the  activity  of  the  general 
exporter.  Occasionally,  indeed,  will  a  general  exporter  under- 
take a  representation,  but  firms  acting  exclusively  on  the  basis 
of  agency  arrangements  are  considered  as  export  agents,  and 
their  activity  is  reviewed  elsewhere. 

A  seeming  resemblance  to  the  functions  of  a  broker  is  lent 
to  the  activity  of  a  general  exporter  when  he  is  visited  by  his 
foreign  customer  and  introduces  him  to  manufacturers  and  busi- 
ness houses.  This  is  done,  however,  on  the  understanding  that 
if  business  results  the  exporter  will  appear  either  as  export 
merchant  or  as  commission  merchant  in  the  transaction,  par- 
ticularly as  the  buyer  is  likely  to  depart  before  the  order  is  ship- 
ped, and  the  services  of  the  exporter  are  required  for  the  finan- 
cing of  the  deal. 

The  exporter  is  not  limited  in  his  activity  to  the  products 
of  his  own  country,  though  he  will  naturally  give  preference  to 
them.  It  is  a  mistake,  for  this  reason  to  grant  an  agency  or 
representation  to  an  exporter  of  a  foreign  nationality.  It  had 
been  the  practice  of  American  manufacturers  to  grant  their  re- 
presentations to  exporters  in  Hamburg  or  Copenhagen,  and  to 
notify,  for  instance,  inquirers  in  Russia  accordingly. 

The  exporter  in  his  relation  to  the  producer  appears  either 
as  buyer  for  own  account  or  as  a  seller  in  the  producer's  name, 
which  is  in  effect  a  constructive  agency.  He  may  after  a  num- 
ber of  transactions  enter  into  an  exclusive  agency  arrangement 
with  the  producer  with  regard  to  a  specified  market,  so  that  the 
producer  will  agree  not  to  sell  to  that  market  excepting  through 
the  exporter,  or  to  sell  at  certain  higher  prices  which  protect 
Ihe  exporter,  or  to  sell  only  to  importers  there  and  not  to  the 


72  INTERNATIONAL  COMMERCE 

native  trade.  The  advantage  of  this  to  the  producer  is  that  as 
an  exclusive  agent  for  a  territory  in  which  he  has  an  efficient 
selling  organization  the  exporter  will  take  special  pains  in  in- 
troducing his  goods,  and  that  since  his  goods  are  not  offered  by 
several  sources,  higher  price  levels  may  be  well  maintained. 

The  exporter  buys  his  goods  as  far  as  possible  direct  from 
the  producer,  excepting  where  the  advantages  of  direct  purchas- 
ing are  out  of  proportion  to  the  difficulties.  This  is  so  in  the 
case  of  agricultural  produce,  or  where  there  are  several  links 
between  the  producer  and  the  exporter  necessary  to  put  a  pro- 
duct into  exportable  shape,  or  when  a  producer  does  not  dis- 
tribute his  products  excepting  through  a  middleman.  In  his  en- 
deavor to  buy  direct  the  exporter  sometimes  contracts  for  the 
entire  output  of  mills. 

The  intervention  of  manufacturers'  agents  is  not  popular 
with  the  exporters  because  it  adds  to  the  cost  of  goods.  But 
it  is  customary  for  many  manufacturers  and  producers  located 
at  a  distance  from  the  export  centers  to  maintain  there  agents 
or  export  representatives,  and  since  it  simplifies  the  routine  to 
deal  with  them,  the  advantage  thus  gained  is  considered  as  out- 
weighing the  disadvantage  of  a  possible  slight  increase  in  the 
cost  of  handling  goods. 

Agents  whose  business  it  is  to  cultivate  the  trade  of  the  ex- 
porters in  an  export  center  are  known  as  export  agents  or  re- 
presentatives. Manufacturers  who  maintain  a  selling  organiza- 
tion for  export  in  the  export  center  cultivate  the  trade  of  the 
exporters  through  their  city  department.  The  activity  of  export 
agents  found  its  greatest  development  in  Hamburg.  These  agents 
sometimes  represented  a  considerable  number  of  manufacturers 
and  maintained"  large  sample  rooms  which  attracted  visits  from 
buyers  all  over  the  world. 

The  exporter  requires  for  his  activity  detailed  catalogs  and 
samples,  which  he  sends  to  his  customers  or  submits  to  them 
through  his  traveling  salesmen.  The  customer  sends  his  orders 
on  the  basis  of  samples,  or  he  may  send  orders,  indicating  the 
price  he  is  willing  to  pay,  but  not  specifying  the  brand  of  goods, 
though  indicating  the  quality.  The  exporter  must  then  shop 
among  manufacturers  until  he  procures  a  quotation  for  the  ar- 


EXPORTERS  CLASSIFIED  73 

tide  desired  which  allows  him  to  supply  it  to  his  customer  with 
a  reasonable  profit. 

The  volume  of  business  and  the  capitalization  of  a  general 
exporter's  business  cover  the  widest  range  of  variety.  Starting 
with  a  small  enteqjrise  dependent  upon  credit  favors  from 
manufacturers,  we  have  every  gradation  to  the  export  and  im- 
port house  of  the  foremost  rank,  financing  business  of  any  ex- 
tent, engaging  even  in  banking  operations  and  granting  loans  to 
foreign  governments.  The  combination  of  the  export  with  the 
import  business  is  a  frequent  one.  If  a  general  exporting  house 
maintains  branches  or  settlements  abroad  it  is  reasonable  to  sup- 
pose that  it  will  aim  to  utilize  them  in  every  direction  and  thus 
will  not  only  sell  in  that  territory  but  will  also  buy  native  pro- 
duce for  which  there  may  be  a  demand  in  the  home  country. 

Eut  even  without  such  branches  and  settlements  abroad 
there  may  be  occasions  which  lead  the  general  exporter  to  as- 
sume the  role  of  an  importer,  though  as  a  secondary  function. 
He  may  wish  to  make  use  of  his  intimate  knowledge  of  and 
connections  with  foreign  markets  in  order  to  profit  also  from 
the  import  of  foreign  produce,  or  he  may  receive  from  his  cus- 
tomer consignments  of  foreign  produce  in  full  or  in  part  pay- 
ment for  goods  sent  him. 

This  is  frequent  in  trade  with  Central  and  South  America, 
or  in  the  trade  of  European  exporters  with  West  Africa.  Since 
such  merchandise  remittances  offer  the  exporter  an  additional 
source  of  profit,  they  are  popular  with  many  exporters. 

When  doing  business  for  his  own  account  with  markets 
where  he  maintains  his  own  branch  establishment,  and  where 
the  native  traders  are  not  in  a  position  to  do  a  direct  business 
with  European  and  American  manufacturers,  the  exporter  has 
little  fear  of  being  eliminated  by  the  producer  or  by  the  cus- 
tomer. But  outside  of  that  he  faces  the  grave  danger  of  either 
party  desiring  to  profit  by  his  elimination, — the  manufacturer, 
for  the  sake  of  securing  higher  prices  or  in  the  hope  of  extend- 
ing his  output  in  a  given  market,  the  buyer,  for  the  sake  of  se- 
curing lower  prices.  The  tendency  to  eliminate  the  exporter  is 
strongest  in  the  case  of  large  manufacturers. 

American  manufacturers  particularly  have  striven  to  do  an 
increasing  direct  export  trade.     British   and   French   manufac- 


74  INTERNATIONAL  COMMERCE 

turers  have  been  loth  to  break  away  from  the  exporter.  Again 
the  nationality  of  the  buyer  is  a  factor  in  the  development  of 
this  tendency.  The  higher  the  development  of  the  country,  the 
more  apt  are  the  buyers  to  seek  the  manufacturer  direct.  Fin- 
ally the  extent  to  which  the  buyer  requires  the  granting  of  credit 
on  long  terms  determines  the  buyer's  loyalty  to  the  exporter. 
The  manufacturer  cannot  grant  long  term  credits  and  is  in  such 
cases  dependent  upon  the  services  of  the  exporter.  This  is  the 
reason  why  Central  and  South  American  customers  have  so 
far  shown  so  little  tendency  to  emancipate  themselves  from  the 
services  of  the  exporter. 

The  exporter,  for  his  part,  at  least  in  former  days,  took  care 
to  protect  himself.  He  endeavored  to  hide  from  his  customer 
the  name  of  the  producer.  He  endeavored  to  conceal  the  name 
and  address  of  his  customer  from  the  manufacturer.  There- 
fore he  frequently  insisted  on  the  so-called  neutral  make-up  of 
goods,  by  which  is  meant  the  removal  of  any  indication  of  the 
source  of  production,  the  adoption  of  special  brands  prepared 
for  the  individual  exporter,  the  preparation  of  special  "neutral" 
catalogs  and  samples,  the  elimination  of  the  name  of  the  con- 
signee from  shipments,  for  which  arbitrary  markings  and  sym- 
bols are  substituted. 

But  this  tendency  on  the  part  of  the  exporters  is  fast  dis- 
appearing in  view  of  the  fact  that  certain  makes  of  manufac- 
tured goods  have  become  very  well  known  in  the  export  field 
and  that  the  publicity  efforts  of  manufacturers  stimulate  the  de- 
mand for  specific  makes.  Far  from  desiring  to  conceal  from 
their  customers  the  origin  of  manufactured  goods  which  ihey 
sell  to  them,  the  exporters  may  be  specifically  instructed  by  them 
to  procure  particular  makes. 

In  considering  the  organization  of  international  commerce 
we  have  throughout  striven  to  cling  to  historically  developed 
types  and  terms  which  have  attained  a  definite  meaning  in  the 
world  trade.  Due  to  the  peculiar  course  which  the  develop- 
ment of  foreign  trade  took  in  the  United  States — first,  the  aloof- 
ness of  many  producers  to  foreign  trading  and  the  pioneer  work 
of  the  commission  merchant,  then  an  increased  interest  and  ap- 
prenticeship stage,  then  a  marvelous  expansion  which  also  at- 
racted  individuals  and  enterprises  from  the  most  inefficient  to 


AGENTS  CLASSIFIED  75 

the  most  efficient,  and  finally  the  extraordinary  spurt  of  intense 
activity  during  the  world  war  which  gave  birth  to  further  vari- 
eties of  export  ventures — there  has  come  about  a  most  deplor- 
able confusion  in  the  United  States  in  the  use  of  such  terms  as 
export  commission  house,  exporter  and  importer,  export  mer- 
chant, export  agent.  Before  identifying  such  enterprises  with 
the  definitions  and  with  the  description  of  their  functions  as 
given  in  this  volume,  it  is  necessary  to  investigate  in  each  in- 
dividual instance  to  what  extent  any  of  the  above  "labels"  are 
properly  used. 

Walter  F.  Wyman,  the  noted  writer  on  export  topics,  gives 
in  the  "World's  Markets"  a  very  accurate  summary  of  the  types 
of  export  agents  according  to  American  usage,  of  which  we  may 
quote  the  following: 

A  simple  definition  of  the  export  agent  is  "one  who  acts 
in  any  selling  capacity  for  the  exporter."  This  definition  has 
the  virtue  of  emphasizing  the  selling  function  of  the  agent  and 
is  broad  enough  to  include  almost  all  of  the  many  types  of  agents 
whose  variety  of  activities  perplexes  both  the  novice  and  veteran 
in  exporting. 

The  first  major  division  of  types  is  based  on  the  location 
of  the  agent.  For  the  export  agent  may,  and  often  does,  have 
his  headquarters — if  not  his  sole  residence — in  the  country  of 
the  exporter.     Agents  of  this  type  include : 

1.  The  American  selling  agency 

2.  The  export  company 

3.  The  export  house 

The  agent  abroad  can  be  similarly  classified : 

1.  The  resident  combination  salesman 

2.  The  manufacturers'  representative 

3.  The  general  importer 

4.  The  wholesaler 

5.  The  wholesaler  and  retailer 

6.  The  retailer 

7.  The  consumer 

The  second  major  division  is  based  on  the  relation  of  the 
agent  to  the  exporter.  This  division  is  one  which  contains  but 
three  classes : 

1.     Those  who  sell  for  the  account  of  the  exporter 


76  INTERNATIONAL  COMMERCE 

2.  Those  who  buy  from  the  exporter  and  resell 

3.  Those  who  buy  but  do  not  resell 

It  is  obvious  that  each  agent  must  be  included  in  both  of 
these  major  divisions.  The  export  house  in  the  United  States 
supplies  the  most  common  example;  for  its  residence  is  in  the 
country  of  the  seller  and  it  buys  from  the  exporter  for  purposes 
of  re-sale  outside  the  United  States.  It  must  be  remembered 
that  there  is  no  agency  relation,  however,  unless  there  are  ex- 
clusive territorial  rights  involved.  Otherwise  the  transaction  is 
simply  between  buyer  and  seller. 

It  is  undeniable  that  there  is  a  great  confusion  in  export 
circles  in  regard  to  the  desirability  or  non-desirability  of  agents. 
The  greater  part  of  this  confusion  is  due  to  the  failure  of  many 
to  recognize  the  existence  of  the  second  major  division. 

To  make  the  distinction  between  the  divisions  entirely  clear, 
it  is  necessary  to  consider  the  first  group  as  representative  of 
the  selling  staff  of  the  exporter  and  to  consider  the  second  group 
as  representative  of  the  customer  of  the  exporter. 

To  illustrate:  let  us  assume  that  in  Lima,  Peru,  there  is 
an  individual  named  John  Jones.  He  makes  his  living  by  selling 
American-made  goods  to  the  merchants  of  Lima.  He  does  not 
carry  stocks  of  merchandise  but  merely  solicits  orders  for  direct 
shipment  from  the  manufacturer  to  individual  merchants.  These 
merchants  are  billed  direct  by  the  manufacturers.  John  Jones 
limits  his  activities  to  the  sale  of  the  products  of  six  American 
manufacturers.  These  pay  him  commissions  on  the  sales  which 
he  makes  and  also  on  any  other  shipments  which  they  make 
to  Lima. 

John  Jones  is  clearly  the  agent  of  these  six  American  manu- 
facturers. He  is  "one  who  acts  in  a  selling  capacity  for  the  ex- 
porter." If  we  analyze  his  relation  to  the  exporter  it  will  be  seen 
that  in  reality  he  is  a  resident  combination  salesman.  He  is  an 
individual  selling  agency  resident  in  the  country  of  his  cus- 
tomers. 

To  illustrate  further :  Henry  Smith  has  an  office  on  Broad- 
way, New  York  City.  He  specializes  on  sales  in  China.  He  re- 
presents a  dozen  x\merican  manufacturers  and  has  established 
connections  with  several  scores  of  merchants  in  China,  who 
usually  accept  his  advice  in  connection  with  their  purchases  of 


AGENTS  CLASSIFIED  77 

American  goods.  He  has  a  carefully  built  up  mailing  list  con- 
taining the  names  of  hundreds  of  native  and  European  firms  in 
China.  He  advertises  in  China  the  products  of  the  American 
manufacturers  whom  he  represents.  He  solicits  orders  for  his 
principals.  He  carries  no  stocks  and  merely  refers  the  orders 
he  recives  to  the  manufacturers.  On  analysis  it  will  be  seen 
that  Henry  Smith  is  a  combination  export  sales  manager  resi- 
dent in  the  country  of  the  manufacturer.  He  is  an  export  agent, 
but  purely  an  export  selling  agent. 

A  single  example  will  differentiate  these  two  types  of  agent 
— the  combination  export  salesman  resident  abroad  and  the  com- 
bination export  sales  manager  resident  in  the  United  States — 
from  the  agent  of  the  older  type.  Enrique  Gonzales  y  Cia.,  of 
Valparaiso,  Chile,  are  wholesalers.  They  specialize  in  the  hand- 
ling of  branded  merchandise.  They  do  not  confine  their  im- 
portation to  products  of  any  one  country,  but  they  do  confine 
their  importations  to  one  maker  in  each  product  which  they 
handle.  Let  us  assume  that  they  are  agents  for  Fownes  gloves, 
Pinaud's  toilet  preparations,  an  Italian  olive  oil,  Gillette  safety 
razors  and  Regal  shoes.  They  do  not  handle  competitive  lines. 
They  offer,  in  return  for  exclusive  rights  for  the  products  which 
they  handle,  a  guaranteed  volume  of  purchases  each  year.  They 
buy  for  their  own  account,  and  sell  not  only  to  retailers  but  also, 
in  some  cases,  to  other  wholesalers  at  a  nominal  profit.  The 
manufacturers  they  represent  have  only  one  account  in  Chile — 
the  agents  themselves — and  all  goods  are  shipped  and  billed  di- 
rect to  them. 

This  example  clearly  differentiates  the  agent  who  buys  for 
his  own  account  from  the  agent  whose  function  is  solely  that 
of  selling.  For  purpose  of  differentiation  it  would  be  well  for 
all  interested  in  exporting  to  term  one  the  "customer-agent"  and 
the  other  the  "selling  agent." 

It  is  well  to  analyze  for  a  moment  the  status  of  the  export 
house  in  the  United  States  in  the  agency  field.  In  theory,  and 
often  in  practice,  the  export  house  is  the  exact  reverse  of  the 
export  combination  salesman  resident  abroad.  For  the  function 
of  the  export  house  in  many  cases  is  that  of  a  buyer  resident  in 
die  United  States  in  the  interest  of  the  foreign  merchant.  This 
is  clearly  proved  by  the  fact  that  the  export  bouse  charges  its 


78  INTERNATIONAL  COMMERCE 

merchant  customers  for  its  services  as  a  buyer;  this  charge  be- 
ing quite  frequently  two  and  one-half  per  cent,  of  the  invoice 
price. 

Export  houses  usually  specialize  either  on  certain  products, 
or  on  certain  territories,  or  on  certain  products  in  certain  ter- 
ritories. From  their  very  different  knowledge  of  the  needs  and 
wants,  tastes  and  whims  of  the  markets  they  serve,  they  are  often 
in  a  position  which  makes  them  desirous  of  controlling  some 
manufacturer's  products  in  certain  territories.  They  offer,  in 
exchange  for  an  exclusive  arrangement,  a  guaranteed  volume  of 
sales  and  the  certainty  of  immediate  distribution.  But  it  is  only 
fair  to  note  that  there  is  a  confusion  of  relations  brought  into 
being  by  their  acceptance  of  an  agency.  With  some  few  non- 
competitive products — products  which  are  absolutely  unique— 
the  export  house  can  retain  its  position  as  buying  representative 
for  foreign  merchants.  But  with  the  majority  of  products,  the 
acceptance  of  an  agency  by  the  export  house  bars  its  own  clients 
from  a  free  and  full  choice  of  competitive  articles. 

With  the  entrance  into  exclusive  arrangements  with  the 
American  manufacturer,  the  obligations  of  the  export  house  be- 
come divided  between  maker  and  merchant.  It  is  not  to  be  gain- 
said that  even  in  the  face  of  the  manifest  anomaly  of  such  dual 
relations,  there  are  many  instances  which  prove  that  both  parties 
have  been  well  served. 

A  more  common  case  of  the  "customer  agent"  than  that  of 
the  Enrique  Gonzales  y  Cia.  example  is  the  agent  who  purchases 
for  his  own  account  for  re-sale  but  who  also  permits  direct 
sales  by  the  American  manufacturer  in  his  territory,  and  who  re- 
ceives both  price  protection  and  a  commission  on  such  direct 
sales.  Such  a  plan  promises  mutual  advantages.  From  the 
manufacturer's  standpoint  it  diffuses  the  credit  risk  by  multi- 
plying the  number  of  his  customers  in  a  given  country.  It  per- 
mits the  manufacturer  to  have  direct  relations  with  firms  of  such 
importance  that  they  might  refuse  to  consider  purchasing 
through  an  intermediary.  It  makes  possible  sales  to  those  who 
from  prejudice  would  decline  to  buy  from  the  "customer  agent." 

The  "customer  agent"  appreciates  the  advantages  to  him  of 
the  sales,  direct  from  the  manufacturer,  to  these  three  groups. 
First  of  all,  they  enable  him  to  receive  commissions  without  the 


AGENTS  CLASSIFIED  79 

investment  of  his  capital  in  undesirably  large  stocks.  Then  they 
bring  in  commission  from  transactions  with  importers  who  are 
equal  to  himself  in  size  and  importance  and  with  whom  no  other 
lines  he  may  be  in  direct  competition.  Again,  it  makes  possible 
commissions  on  sales  which  come  from  firms  with  whom  he  is 
not  on  friendly  terms.  Above  all,  from  the  agent's  standpoint, 
it  forces  the  manufacturer  to  greater  sales  effort  in  order  to 
secure  and  develop  these  direct  accounts  and  thus  gives  him 
profits  he  could  neither  afford  to  seek  nor  expect  success  in  seek- 
ing. Finally,  the  alert  agent  realizes  that  in  many  lines  the 
greater  the  direct  distribution,  the  greater  the  demand  from  con- 
sumers and  the  lower  the  sales  expenses  on  his  own  sales  to  his 
own  customers. 

In  dividing  into  the  two  major  divisions  all  agency  types, 
we  pointed  out  that  there  were  three  sub-divisions  resident  in 
the  United  States. 

1.  The  American  selling  agency 

2.  The  export  company 

3.  The  export  house 

Of  these  we  have  so  far  examined  only  the  export  house 
and  rather  roughly  outlined  the  selling  agency  of  the  type  we 
termed  the  "combination  export  sales  manager  resident  in  the 
United  States."  There  remains  the  export  company  which  buys 
for  its  own  account.  The  export  company  is  thus  clearly  dif- 
ferentiated from  the  American  selling  agency  which  performs 
only  the  selling  function,  and  from  the  export  house  which  does 
not  buy  for  its  own  account  but  which  is  the  buyer  for  the  for- 
eign merchant  and  merely  carries  out  his  wishes  and  finances  the 
transaction. 

The  export  company  is  in  reality  an  exporter  who  does  not 
manufacture  the  goods  it  sells  but  which  assumes  all  other  f un- 
tions  of  the  manufacturing  exporter.  It  carries  stocks  both  at 
home  and  abroad  for  its  own  account.  It  develops  its  own  cus- 
tomers and  appoints  its  own  agents,  and  often  has  its  own  ex- 
port travelers.  It  is  usual  for  the  export  company  to  specialize 
either  on  certain  territories  or  certain  products,  and  to  seek  from 
manufacturers  exclusive  agency  connections.  Not  infrequently 
an  export  company  will  market  the  entire  production  of  a  mill 
or  factory  or  contract  for  the  surplus  of  a  mill  or  factory  over 


80  INTERNATIONAL  COMMERCE 

its  domestic  requirements.  When  it  actually  owns  mills  and  fac- 
tories outright  or  interests  in  mills  or  factories  it  becomes  to  that 
extent  and  for  such  product  or  products  a  manufacturing  ex- 
porter. It  may  thus  be  in  part  a  manufacturing  exporter  while 
simultaneously  exercising  the  function  of  an  export  company  for 
other  products. 

We  classified  the  agent  resident  abroad  thus: 

1.  The  resident  combination  salesman 

2.  The  manufacturers'  representative 

3.  The  general  importer 

4.  The  wholesaler 

5.  The  wholesaler  and  retailer 

6.  The  retailer 

7.  The  consumer 

Of  these  seven  classifications  we  have  used  for  illustrations 
the  first  and  fourth — the  resident  combination  salesman  and  the 
wholesaler.  We  can  ignore  the  export  company  resident  abroad ; 
for  the  functions  of  such  a  company  are  practically  identical 
with  those  of  the  export  selling  company  resident  in  the  United 
States. 

The  manufacturers'  representative  is  in  many  cases  identical 
with  the  resident  combination  salesman.  But  in  a  growing  num- 
ber of  cases  the  manufacutrers'  representative  is  less  a  traveler 
and  more  of  an  employer  of  travelers.  He  is  more  and  more 
opening  sales  and  display  rooms  and  more  and  more  carrying 
stocks,  limited  perhaps  in  variety  and  containing  only  articles  in 
greatest  demand,  but  purchased  outright  and  carried  more  for 
accommodation  and  rapid  development  of  sales  than  for  profit. 

The  general  importer,  as  an  agent,  is  one  of  the  oldest  types 
and  one  which  is  declining  rather  than  advancing  in  favor. 
Three  or  four  decades  ago  it  was  not  uncommon  for  a  single 
general  importer  to  be  the  agent  for  agricultural  machinery,  for 
perfumery  and  for  bulk  food  products.  No  line  was  too  large 
and  none  too  small  for  him  to  handle  as  agent.  His  strength 
was  in  his  personal  reputation  and  his  knowledge  of  the  market 
which  he  served.  He  was,  in  many  markets,  as  much  a  repre- 
sentative of  the  United  States  or  of  England  as  the  consular 
officials,  and  he  was  so  regarded  by  the  merchants.  But  with 
the  increased  activities  of  the  export  houses  and  of  the  direct 


AGENTS  CLASSIFIED  M 

representatives  of  manufacturing  exporters,  that  era  passed. 

The  wholesaler  and  retailer  type  of  agent  was  in  great  vogue 
a  decade  or  two  ago.  The  newly  fledged  manufacturing  ex- 
porter recognized  this  type  of  agent  as  well  worth  cultivating. 
The  wholesaler  and  retailer  bought  outright,  gave  at  once  dis- 
tribution (in  his  home  city)  to  the  consumer,  and  through  his 
wholesale  activities  gave  further  distribution  to  outlying  dis- 
tricts. Almost  invariably  such  agents  were  strong  financially, 
enjoyed  a  good  reputation  and  brought  the  products  they  favored 
into  quick,  if  limited,  demand.  In  some  markets  these  whole- 
sale and  retail  agent  outlets  actually  sold  other  wholesalers  who 
were  willing  to  concede  a  small  profit  to  the  agent  in  return  for 
the  convenience  of  making  use  of  the  stock  which  he  carried. 

The  great  drawback  to  the  wholesale  and  retail  agent  came 
in  territories  where  the  agent,  while  active  and  able,  was  not 
as  widely  or  as  well  liked  by  retailers  as  the  out  and  out  whole- 
saler who  was  in  no  way  a  competitor.  Agencies  granted  the 
combined  wholesaler  and  retailer  in  such  circumstances  very 
definitely  limited  distribution  and  made  it  quite  possible  for  a 
later  arrival  in  the  field  to  ignore  all  agency  plans,  sell  all  good 
wholesale  outlets  and  easily  secure  a  distribution,  well  balanced 
and  widespread,  impossible  to  the  product  restricted  to  a  limited 
outlet.  While  these  direct  non-agency  efforts  were  high  in  first 
cost,  they  very  generally  proved  profitable  over  a  long  term  of 
years.  Because  of  the  greater  number  of  retail  outlets  obtained 
through  sales  to  all  wholesalers  (except  the  competitive  agent) 
general  advertising  to  consumers  was  not  wasteful  and  could 
be  effectively  used. 

In  the  lesser  markets  of  the  world  it  is  often  found  that  the 
exclusive  representation  of  the  leading  retailer  is  more  profit- 
able than  all  possible  sales  which  would  exclude  the  leading  re- 
tailer. In  order  that  the  leading  retailer  might  have  a  real  in- 
centive to  handle  a  manufacturer's  product  to  the  exclusion  of 
all  others,  some  far-sighted  manufacturing  exporters  made  a 
practice  of  sacrificing  the  sales  possibilities  of  the  lesser  outlets 
and  granting  the  exclusive  selling  rights  to  their  chosen  retailer, 
and  made  no  other  efforts,  direct  or  through  their  agent,  to  se- 
cure sales  to  other  retailers. 

On  the  surface,  it  is  absurd  to  consider  a  consumer  as  an 


82  INTERNATIONAL  (JOAIALEKCE 

exclusive  agent.  The  title  "agent"  is  indeed  a  misnomer  in  con- 
nection with  consumer,  unless  the  "consumer"  sell  other  con- 
sumers— in  which  case  he  becomes  in  reality  a  retailer.  But  a 
maker  of  sugar  mill  machinery  might  well  be  content  with  the 
entire  equipment  of  the  larger  of  two  sugar  centrals  and  grant 
the  exclusive  rights  of  use  to  such  an  "agent."  This  is  by  no 
means  an  unknown  arrangement.  When  it  is  based  on  careful 
study  of  conditions  and  the  agreement  covers  a  long  period  of 
years,  it  is  usually  found  to  have  mutual  advantages  in  exchan- 
ing  the  greater  purchasing  power  of  the  "agent"  for  the  ex- 
clusive features  of  the  products  of  the  manufacturer.  Dairy 
machinery  has  been  marketed  in  many  parts  of  the  world  on  the 
equivalent  of  a  "consumer  agency"  basis. 

It  is  not  at  all  unusual  for  a  commission  export  salesman 
resident  abroad  to  assume  only  for  certain  lines  several  other 
functions.  He  may,  for  example,  in  order  to  introduce  a  tech- 
nical line,  employ  a  skilled  assistant,  carry  stocks  of  parts  and 
do  repairs.  He  may  also  see  opportunity  for  profit  beyond  mere 
commissions  and  buy  outright,  turning  over  his  complete  pur- 
chase on  arrival  and  re-billing  to  his  customers.  Similarly,  an 
export  selling  company  resident  in  the  United  States  may  not 
hesitate  to  depart  from  its  general  policy  and  be  in  effect  a  sales- 
man, buying  no  goods  and  acting  merely  in  the  capacity  of  pro- 
fessional introducer  of  maker  to  merchant.  This  is  true  in  mar- 
kets in  which  the  selling  company  has  no  direct  connections 
and  in  which  it  does  not  desire  to  act  in  its  broadest  capacity. 

Because  of  these  variants  from  the  regular  channels  of 
operation  of  the  several  types,  it  is  incumbent  on  the  exporter 
to  be  certain  not  only  that  he  is  cognizant  of  the  usual  method 
employed  by  the  type  of  agency  which  he  is  considering,  but  also 
that  he  knows  precisely  the  form  of  activity  which  the  prospec- 
tive agent  will  use  if  intrusted  with  the  agency  for  the  manu- 
facturer's products.  Hardly  any  two  American  selling  agencies 
operate  along  the  same  lines.  It  is  safe  to  say  that  no  two  ex- 
port companies  employ  exactly  the  same  general  tactics;  while 
among  the  export  houses  which  depart  from  the  role  of  buyers 
for  foreign  merchants  there  is  absolutely  no  uniformity  of 
practice. 

Even  within  any  one  agent's  own  policy  there  will  be  found 


DIRECT  EXPORTING  S3 

myriads  of  sub-policies.  This  is  practically  true  in  connection 
with  agencies  which  are  expanding  their  scope  of  action.  An 
export  company  may  well  have  branch  houses  in  Buenos  Aires, 
London  and  Paris  and  yet  only  have  correspondence  relations 
with  Rio  de  Janeiro,  Belfast  and  Bordeaux.  It  may  send  its 
own  trained  travelers  to  Cuba  and  Mexico  and  yet  have  second 
rate  sub-agents  (and  these  only  retailers)  in  Costa  Rica  and 
Panama.— (Walter  F.  Wyman  in  "The  World's  Markets.") 

2.    Advantages  and  Disadvantages  of  Indirect  and 
Direct  Exporting. 

We  may  now  consider  the  advantages  and  the  disadvantages 
of  indirect  and  of  direct  exporting  from  the  point  of  view  of 
the  manufacturer. 

Among  the  advantages  of  doing  an  export  business  through 
commission  and  export  merchants  the  manufacturer  may  count 
the  following: 

a)  It  simplifies  the  manufacturer's  business  not  to  carry  on 
the  export  of  his  goods  through  his  own  organization.  The 
commission  house  employs  buying,  shipping,  insuring,  financing 
experts  and  traveling  salesmen,  and  the  manufacturer  ordina- 
rily cannot  duplicate  such  an  organization.  He  can  devote  his 
attention  to  the  technical  part  of  his  business  more  fully,  if  freed 
from  the  engrossing  business  of  merchandizing  abroad. 

b)  The  mediation  of  the  export  house  eases  the  financial 
burden  of  the  manufacturer,  inasmuch  as  he  receives  his  payment 
from  an  exporter  very  much  on  the  same  terms  as  from  his 
domestic  trade,  whereas  the  exporter  assumes  the  risk  and  the 
burden  of  granting  necessary  credits  to  the  foreign  buyer,  which 
in  many  markets  is  an  important  consideration. 

c)  The  mediation  of  the  exporter  with  his  guarantee  of  ac- 
counts (del  credere)  and  the  relative  ease  with  which  the  credit 
standing  of  the  exporter  may  be  ascertained  as  compared  with 
that  of  the  foreign  customer  lessens  the  financial  risk  of  the 
manufacturer  involved  in  exporting  . 

d)  The  exporter  handling  a  variety  of  products  can  cover 
a  market  more  cheaply  for  special  products,  lessening  the  over- 
head expense.     The  exporters  receive  more  inquiries  for  products 


M  INTERNATIONAL  COMMERCE 

than  an  individual  manufacturer,  due  to  the  intense  canvassing  of 
foreign  markets  and  closer  connections  with  the  foreign  customers. 
The  comparative  cheapness  of  his  organization  permits  the  ex- 
porter to  extend  it,  opening  new  branches,  undertaking  selling 
journeys,  employing  better  trained  salesmen  and  representatives. 
His  local  connections  lessen  the  risk  of  selling  to  customers  of 
poor  standing.  His  losses  are  proportionately  smaller,  clue  to 
the  wide  range  of  his  business  transactions  in  a  given  market, 
than  would  be  in  the  case  of  a  manufacturer  making  occasional 
sales  in  one  specific  class  of  products  in  a  given  market.  Export 
is  the  exporter's  sole  business,  while  it  is  a  secondary  considera- 
tion with  the  manufacturer.  The  exporter  can  afford  to  enter 
into  more  risky  and  profitable  transactions  due  to  his  connec- 
tions and  to  meet  the  credit  requirements  of  customers  more 
readily. 

Indirect  exporting,  however,  has  its  own  disadvantages. 
The  goods  reach  the  customer  at  a  higher  price,  due  to  the 
middleman's  intervention,  which  must  affect  their  sales  pros- 
pects or  the  manufacturer's  profits.  The  difference  in  price  is 
not  fully  equivalent,  however,  to  the  exporter's  profit,  because 
his  selling  expenses  are  lower  and  his  losses  proportionately  less. 
The  exporter  cannot  be  expected  to  interest  himself  in  the  pro- 
motion of  the  sale  of  a  specific  make  or  brand  of  goods.  He 
is  more  or  less  independent.  He  may  not  take  the  trouble  to 
push  a  new  article. 

The  exporter  cannot  have  the  technical  knowledge  of  every 
line  handled  by  him,  nor  can  he  therefore  always  give  such  in- 
formation to  the  manufacturer  which  will  enable  him  to  meet 
competition. 

The  manufacturer  can  protect  his  interests  in  this  connec- 
tion by  sending  his  employees  to  study  special  markets,  by 
utilizing  means  of  publicity  and  by  compelling  the  exporter  to 
sell  his  goods  under  his  established  trade-mark  or  name. 

Turning  to  a  consideration  of  the  advantages  of  direct 
exporting,  we  find  that  the  principal  advantage  of  direct  export- 
ing is  in  the  fact  that  here  we  have  the  manufacturer's  own 
sales  organization  devoting  itself  exclusively  to  the  promotion 
of  the  sale  of  the  manufacturer's  products.  His  sales  organ- 
ization is  generally  composed  of  persons  having  a  thorough  tech- 


DIRECT  EXPORTING  S5 

nical  knowledge  of  his  line.  He  can  study  and  employ  the  best 
methods  for  marketing  his  products  in  special  markets.  The 
elimination  of  the  exporter's  profit  is  a  minor  advantage. 

The  disadvantages  of  direct  exporting  are  found  in  the  dis- 
sipation of  effort  implied  in  the  establishment  of  a  special  sales 
organization  for  export,  the  diverting  of  capital  from  production 
to  merchandizing,  the  inadequate  knowledge  of  special  markets, 
the  necessity  of  an  attitude  of  reserve  to  the  question  of  credit, 
which  affects  the  sale  of  the  product  in  many  markets. 

Economically  inadvisable  is  the  creation  of  a  special  sales 
organization  for  foreign  trade,  with  branches,  traveling  sales- 
men, representatives,  etc.,  where  the  results  which  the  manufac- 
turer may  obtain  thereby  cannot  cover  the  cost.  Several  manu- 
facturers in  non-competing  lines  may  combine  to  overcome  this 
phase.  But  the  advantages  of  a  fully  independent  sales  organ- 
ization cannot  be  met  by  such  an  arrangement.  And  it  is  dif- 
ficult to  have  a  combined  organization  which  would  include  per- 
sons having  a  thorough  technical  knowledge  of  each  line. 

It  is  impossible  to  form  a  decision  applicable  to  all  cases 
as  to  the  question  whether  it  is  better  to  sell  direct  or  indirect. 
All  of  the  considerations  mentioned  in  the  foregoing  must  be 
fully  weighed,  each  case  must  be  decided  on  its  merits.  It  may 
be,  however,  definitely  stated  that  the  existence  of  an  indepen- 
dent export  merchant  class  is  a  basic  condition  for  the  success 
of  an  industry  dependent  upon  export.  For  this  reason  manu- 
facturers in  whose  case  the  advantages  of  trading  through  ex- 
porters outweigh  the  disadvantages  must  not  begrudge  the 
profits  of  exporters.  The  introduction  of  a  manufactured  pro- 
duct in  a  foreign  market  is  an  expensive  and  laborious  under- 
taking, requiring  the  expenditure  of  money  and  effort,  which  the 
exporter  assumes  willingly  in  the  hope  that  he  will  reap  the 
fruits  of  his  activity  in  a  permanent  connection  with  the  manu- 
facturer. 

If  after  the  exporter  has  introduced  a  manufactured  pro- 
duct in  a  certain  market  the  manufacturer  attempts  to  go  around 
him  and  to  enter  into  direct  relations  with  the  exporter's  cus- 
tomers, he  acts  disloyally.  If  the  exporter  has  attained  success 
with  the  assistance  of  the  manufacturer  who  has  given  him 
samples  and  aided  him  with  low  quotations  and  then  exploits 


86  INTERNATIONAL  COMMERCE 

the  manufacturers'  competitors,  he  acts  as  disloyally.  The  im- 
proper competition  between  manufacturers  and  exporters  in 
specific  markets  may  have  a  very  detrimental  effect  upon  busi- 
ness with  a  given  market. 

The  manufacturer  in  his  export  activity  will  do  well  to 
study  the  adaptability  of  his  product  for  each  specific  market, 
and  weigh  all  the  pros  and  cons  with  regard  to  direct  and  in- 
direct export  trading  and  to  adopt  such  a  policy  for  each  mar- 
ket as  is  dictated  by  circumstances.  He  will  find  that  for  some 
products  and  markets  the  direct  trading  policy  will  promise  the 
greatest  prospect  of  success,  and  for  others  the  mediation  of  gen- 
eral export  merchants. 

In  considering  the  pros  and  cons  of  direct  and  indirect  ex- 
porting, we  must  not  overlook  a  consideration  of  the  advantages 
and  disadvantages  of  buying  through  export  commissions  mer- 
chants from  the  point  of  view  of  oversea  customers. 

The  principal  advantage  for  the  oversea  customer  in  buying 
through  an  export  commission  merchant  lies  in  his  obtaining  by 
such  means  the  services  of  an  unofficial  purchasing  agent  in  the 
exporting  country.  Importers  located  overseas  appreciate  this 
service.  Their  purchasing  is  simplified  and  put  on  an  economic 
basis.  The  item  of  cabling  expense  alone  when  dealing  through 
one  purchasing  source  affords  a  great  saving.  The  more  im- 
portant advantage  is  in  the  fact  that  an  importer  located  abroad 
is  not  in  a  position  to  find  the  most  advantageous  sources  of  sup- 
ply in  the  exporting  country.  The  export  commission  merchant 
can  do  his  "shopping"  for  him  among  competing  manufacturers. 
He  is  in  a  position  to  buy  more  cheaply  because  he  offers  the 
manufacturer  better  terms  of  payment  than  the  oversea  buyer 
can  as  a  rule  offer.  Of  course  this  is  an  advantage  only  if  the 
saving  effected  exceeds  the  exporter's  commission  or  profit. 
In  the  matter  of  looking  after  shipments  the  exporter  also  pro- 
tects the  interests  of  the  oversea  customer.  The  exporter's 
financing  services  are  of  great  value  to  the  oversea  customer. 
Finally  he  is  able  to  "bunch"  into  one  shipment  a  number  of 
smaller  requirements  by  utilizing  the  services  of  the  exporter, 
whereas  placing  orders  for  several  smaller  lots  of  goods  direct 
with  manufacturers  renders  it  impossible  for  the  oversea  cus- 


DIRECT  BXPOBTlNQ  Si 

tomer  either  to  obtain  satis  factor}'  quotations  or  economic  ship- 
ments. 

Among  the  disadvantages  of  doing  business  through  an  export 
merchant  from  the  point  of  view  of  the  oversea  customer  must  be 
mentioned  the  increased  cost  of  goods  through  the  additional 
link,  which  is  an  important  item  in  those  instances  when  the 
export  merchant  is  not  in  a  position  to  buy  an  article  more  cheap- 
ly than  the  oversea  customer  might  buy  direct;  the  risk  of  bias 
on  the  part  of  the  export  merchant  who  may  procure  goods 
from  a  less  desirable  source  because  this  may  be  a  matter  of 
personal  advantage;  the  lack  of  technical  knowledge  on  the 
part  of  the  export  merchant,  and  possible  dishonesty,  improper 
tactics,  etc.,  in  the  case  of  small  irresponsible  concerns.  On  the 
whole  these  disadvantages — outside  of  the  first  named — may  be 
eliminated  by  the  exercise  of  caution  and  the  use  of  ordinary 
commercial  safeguards  in  the  selection  of  such  a  connection. 

The  points  at  issue  between  American  manufacturers  and 
exporters  have  been  frequently  aired  at  foreign  trade  conven- 
tions. The  debt  of  American  manufacturers  to  the  enterprise 
of  American  exporters  in  the  formative  stage  of  American  ex- 
porting cannot  be  exaggerated.  The  desire  of  American  manu- 
facturers to  do  a  direct  business,  wherever  such  a  course  is  pro- 
mising of  success,  is  only  natural,  however.  There  is  no  neces- 
sity for  a  vital  conflict  between  this  attitude  on  the  part  of  the 
manufacturers  and  the  indubitable  importance  of  the  functions 
of  the  export  merchants  and  their  assured  position  in  the  eco- 
nomy of  international  commerce  wherever  they  supply  a  need. 
The  position  of  the  exporter  was  well  expressed  by  YVm.  H. 
Knox,  a  speaker  at  the  Convention  of  the  National  Foreign 
Trade  Council  in  Pittsburgh  (1917)  : 

"The  present  day  function  of  the  exporter  and  foreign  com- 
mission merchant  seems  to  be,  in  brief,  highly  specialized  expert 
service,  comprising  salesmanship,  knowledge  of  shipping,  marine 
and  war  risk  insurance,  credit  information,  banking,  foreign 
exchange,  and  every  detail  required  for  the  efficient  bringing  to- 
gether of  producer  and  consumer  wherever  located  in  the  for- 
eign field,  and  when  it  is  remembered  that  by  means  of  quick 
cable  service  and  efficient  organization,  South  Africa,  New 
Zealand  and  other  remote  parts  of  the  world  are  on  an  average 


88  INTERNATIONAL  COMMERCE 

within  one  hour's  time  of  New  York  City,  there  would  seem  to 
be  some  good  reasons  for  assuming  that  the  properly  equipped 
export  house  is  in  a  position  to  render  most  valuable  service  to 
any  American  manufacturer  desirous  of  obtaining  a  foreign  mar- 
ket for  his  products.  Some  necessary  distinction  should  be 
made  between  the  export  merchant  who  sells  to  the  foreign 
trade,  as  a  merchant,  and  the  commission  merchant  who  may 
place  orders  with  American  manufacturers  for  foreign  account, 
and  receiving  from  buyers  a  commission  for  the  handling  of 
such  business,  or  who  sells  to  the  foreign  buyer  for  manufac- 
facturer's  account  with  commissions  on  such  sales  paid  by  the 
manufacturer.  These  three  methods  are  properly  the  particular 
business  of  those  entering  into  such  arrangements  and  they  need 
not  be  discussed  at  this  time,  but  we  might  mention  that  the 
larger  lines  of  great  American  staples  are  being  handled  to-day 
on  the  first-named  basis.  From  time  to  time  criticism,  more  or 
less  justified,  may  be  made  of  exporters'  business  methods,  but 
we  have  usually  found  that  the  cause  for  such  criticism  origin- 
ates through  misunderstandings  readily  adjusted,  when  both 
parties  to  the  question  can  get  together  and  disclose  the  facts  of 
the  difficulty.  Something  perhaps  could  be  said  in  criticism  of 
manufacturers  and  some  of  their  business  methods,  but  as  we 
are  not  here  for  any  such  purpose,  it  is  sufficient  to  say  that 
mistakes  are  always  possible,  and  when  they  occur  it  should  be 
the  good  business  of  both  parties  to  make  such  connections  as 
required  by  circumstances,  and  there  is  of  course  always  the 
alternative  of  the  manufacturer  placing  his  interests  in  other 
hands,  or  dealing  direct  with  foreign  buyers  should  this  better 
suit  his  convenience. 

"In  conclusion  you  will  permit  me  to  say,  that  while  in  some 
lines  of  business  the  exporter  might  be  considered  as  a  middle- 
man, whose  services  are  not  required,  we  think  you  will  find  by 
actual  experience  that  he  is  in  a  position  to  offer  the  greatest 
amount  of  expert  service  and  knowledge  in  his  particular  field 
for  less  compensation  than  is  being  paid  in  any  other  line  of 
business  activity,  and  while  to  some  of  you  he  may  appear  to 
be  an  unnecessary  evil,  the  facts  at  your  command,  if  you  chose 
to  thoroughly  investigate  the  best  interests  of  the  business  you 
are  seeking  to  develop,  would  indicate  to  the  contrary." 


EXPORT  CENTERS  80 

3.     The  Growth  and  Development  of  Export  Centers. 

An  export  shipping  center  is  the  place  from  which  goods 
are  shipped  out  of  the  country  in  large  quantities.  An  export 
trading  center  is  the  place  from  which  a  large  export  business 
is  conducted.  These  two  terms  are  not  necessarily  identical. 
Liverpool  and  Antwerp,  for  instance,  are  more  noted  as  export 
shipping  than  as  export  trading  centers.  Iron  and  steel  pro- 
ducts may  be  sold  from  New  York  and  never  pass  through  New 
York  but  be  directed  from  the  mill  by  the  shortest  route  to  the 
point  of  shipment,  which  may  be  Seattle  or  Mobile.  This  in- 
dependence of  the  exporter  from  the  actual  shipping  route  of 
the  goods  permits  the  exporter  to  handle  not  only  the  products 
of  the  industrial  territory  subservient  to  the  export  center  where 
he  is  located  but  also  far  beyond  its  boundaries. 

Apart  from  the  fact  that  great  exporting  firms  naturally 
made  their  original  headquarters  in  prominent  export  ship- 
ping ports,  exporters  generally  establish  themselves  where  they 
are  in  the  center  of  a  prominent  industry  capable  of  producing 
goods  for  export,  or  within  a  very  convenient  approach  to  it, 
and  preferably  in  large  cities  where  stocks  of  goods  can  be  con- 
veniently warehoused.  The  points  where  railroads  have  their 
terminals  and  goods  must  be  transferred  or  transshipped  are  also 
desirable.  Centers  of  freight  forwarding  business,  particularly 
ports  where  exporters  doing  an  import  business  in  addition  to 
their  export  business  can  receive  shipments  from  their  oversea 
customers  and  connections,  play  also  an  important  part. 

In  the  United  States  New  York  City  is  the  premier  export 
shipping  and  export  trading  center.  Here  we  have  a  port  serv- 
ing a  large  industrial  territory,  railroad  termini,  warehouses,  the 
starting  point  and  the  destination  of  many  steamship  and  sail- 
ing ship  lines.  In  Cincinnati,  Chicago,  Saint  Louis,  we  have 
prominent  trading  centers.  Boston  is  an  export  shipping  and 
trading  center  particularly  for  the  leather  trade.  San  Francisco 
and  Seattle  are  prominent  export  shipping  centers  for  the  Far 
East  Trade,  and  here  great  shipments  of  Far  East  produce  are 
also  received,  and  a  large  export  and  import  trading  community 
has  developed  in  both  cities. 

In  Europe  we  have  an  example  of  an  export  trading  center 


90  INTERNATIONAL  COMMERCE 

which  is  not  an  export  shipping  center  in  the  city  of  Paris,  and 
before  the  war  Berlin  was  a  case  in  point. 

An  export  center  attains  an  international  importance  either 
because  of  the  quantity  and  the  variety  of  goods  traded  in  and 
shipped  from  there,  or  from  the  specialization  in  that  center  in 
certain  lines  of  goods  and  from  serving  a  special  territory. 
London  is  the  principal  export  center  for  certain  British  colo- 
nies. Hamburg  used  to  have  the  pre-eminence  in  South  and 
Central  American  trade.  It  must  yield  in  this  respect  to  New 
York  as  the  prospective  result  of  the  international  commercial 
changes  consequent  to  the  great  war. 


CHAPTER  V. 
I.    The  Organization  of  the  Export  Trade  (continued). 

B.      THE  COMMERCIAL  CONNECTIONS  BETWEEN  THE 
EXPORTING  AND  THE  IMPORTING  COUNTRY. 

I.     Connections  Opened  Through  the  Initiative  of  the  Buyer. 

The  connection  between  the  exporting  and  the  importing 
country  may  be  initiated  by  the  buyer  or  by  the  seller. 

Connections  between  the  exporting  and  the  importing  coun- 
try on  the  initiative  of  the  buyer  may  be  opened  in  various 
ways : 

i.  Through  buying  trips.  2.  Through  buying  agents  domi- 
ciled in  the  exporting  country.  3.  Through  buying  branches  or 
through  members  of  the  importing  firm  taking  up  residence  in 
the  exporting  country  for  the  purpose  of  attending  to  purchases. 
4.  Through  correspondence. 

1.  Buying  trips  may  be  undertaken  by  the  head  of  the  buy- 
ing firm,  by  an  employee  or  by  an  agent  undertaking  to  make 
purchases  for  a  number  of  firms.  The  buyer  may  be  a  merchant 
doing  business  for  his  own  account  or  on  commission  basis.  In 
the  latter  case  his  position  is  very  similar  to  that  of  a  traveling 
purchasing  agent,  excepting  that  he  concludes  business  in  his 
own  name. 

At  the  buying  point  the  buyer  frequently  utilizes  the  ser- 
vices of  export  commission  merchants  or  of  brokers,  who  in- 
troduce him  to  the  manufacturers  and  sometimes  act  as  inter- 
preters. When  business  is  concluded,  the  export  commission  mer- 
chant intervenes  as  a  participant,  largely  for  the  purpose  of 
financing  the  business,  while  the  broker's  activity  ordinarily  ends 
with  th-e  conclusion  of  the  business.  The  export  commission 
merchant  receives  his  remuneration  mostly  from  the  buyer, 
whereas  the  broker  receives  his  commission  often  from  both 
parties  and  occasionally  only  from  the  seller,  who  is  anxious  to 
have  the  broker  introduce  to  him  as  many  foreign  customers  as 


92  INTEENATIONAL  OOMMEBCE 

possible.  These  brokers  are  frequently  fellow  countrymen  of 
the  buyer,  and  sometimes  the  introduction  may  be  effected  by 
semi-public  organizations  such  as  manufacturers'  associations, 
chambers  of  commerce,  commercial  museums,  in  which  case,  in 
the  United  States  at  least,  no  brokerage  fee  or  commission  is 
charged,  though  in  Europe  similar  organizations  are  not  above 
accepting  a  commission  on  the  business  concluded.  Occasionally 
banks  maintaining  foreign  trade  departments  introduce  their  for- 
eign visitors  to  desirable  connections,  generally,  of  course,  among 
the  bank's  own  clientele. 

The  personal  visit  of  the  buyer  lends  the  business  for  the 
lime  being  a  local  character,  but  since  as  a  rule  the  buyer  does 
not  accept  the  goods  himself  while  visiting  the  seller,  and  the 
goods  are  shipped  at  a  future  time  to  the  foreign  destination, 
the  export  character  of  the  transactions  is  maintained. 

Some  countries  are  more  than  others  in  the  habit  of  send- 
ing buyers  to  the  exporting  centers.  American  importers,  South 
and  Central  Americans,  and  lately  Japanese  and  Australian  mer- 
chants are  more  active  in  this  respect  than  importers  in  Africa, 
India  and  certain  other  countries. 

In  order  to  attract  buyers'  visits,  the  export  center  must  be 
favorably  located  from  the  point  of  view  of  geographical  situ- 
ation and  provide  special  attractions,  or  it  may  temporarily  be 
in  a  position  to  attract  them  because  of  political  reasons,  as  for 
instance  New  York  did  during  the  recent  war,  when  numerous 
buyers  ordinarily  visiting  Europe  made  their  pilgrimages  to  New 
York.  Paris  is  a  city  which  has  exerted  an  immense  attraction 
to  Latin-American  buyers.  Again  export  centers  which  permit 
a  survey  of  the  entire  industrial  resources  of  a  country  available 
for  export  have  attracted  large  throngs  of  foreign  buyers,  as 
Hamburg  dia  before  the  war  with  its  comprehensive  collections 
of  samples ;  or  industrial  communities  where  a  special  indus- 
try is  largely  centered  as  the  machine  tool  industry  in  Cincinnati, 
or  as  the  packing  industry  in  Chicago,  or  New  York  with  its 
wonderfully  accessible  grouping  by  industries  within  a  narrow 
radius ;  and  finally  places  where  at  specified  times  are  held  spe- 
cial fairs  and  expositions,  as  the  Leipsic  fair,  the  Lyons  sample 
fair,  the  Nizhni- Novgorod  fair,  the  Automobile  show  in  New 
York. 


COMMERCIAL  CONNECTIONS  y;{ 

The  tendency  of  attracting  buyers  by  maintaining  exhibits 
of  manufactured  products  has  been  taken  advantage  of  New  York 
in  the  installation  of  the  centrally  located  co-operative  exhibit  by 
the  Bush  Terminal  Company  (International  Buyers  Club).  Many 
American  organizations,  as  the  National  Association,  of  Manu- 
facturers, American  Manufacturers'  Export  Association,  the  For- 
eign Department  of  the  National  City  Bank,  offices  of  the  Bureau 
of  Foreign  and  Domestic  Commerce,  export  publications  like 
"The  World's  Markets,"  are  sought  out  by  foreign  buyers  be- 
cause of  facilities  offered  them. 

2.  The  foreign  buyer  may  make  his  purchases  through 
agents  domiciled  in  the  exporting  country  and  making  periodical 
trips  to  the  industrial  centers.  United  States  as  an  importing 
country  avails  itself  largely  of  this  medium.  Buying  agents  of 
this  character  generally  accept  the  goods  and  pay  for  them  and 
are  known  as  export  agents. 

3.  Foreign  buyers  who  regularly  buy  large  quantities  of 
goods  in  a  specific  export  center  frequently  establish  a  buying 
office  there  which  is  charged  solely  with  effecting  purchases  in 
behalf  of  the  parent  establishment.  Many  Japanese  firms  main- 
tain such  offices  in  the  United  States,  and  many  colonial  firms 
have  such  offices  in  England,  while  American  department  stores 
maintain  buying  offices  in  Paris,  in  the  Far  East  and  in  many 
other  places  whence  imports  into  the  United  States  originate. 

4.  Correspondence  is  the  most  frequent  medium  of  con- 
nection between  buyers  abroad  and  sellers  in  the  exporting  coun- 
try. It  may  be  the  sole  medium  or  it  may  supplement  those  al- 
ready mentioned.  While  the  cheapest  medium,  it  has  the  de- 
fect of  delays  due  to  mails,  which  is  somewhat  counteracted  by 
the  use  of  the  speedier,  though  more  expensive  and  risky  me- 
dium of  cabling,  and  another  defect  is  the  difficulty  of  arrang- 
ing a  thorough  examination  of  qualities  by  correspondence. 

2.   Connections  Opened  Through  the  Initiative  of  the  Seller. 

Connections  between  the  exporting  and  the  importing  coun- 
try on  the  initiative  of  the  seller  may  be  opened  in  the  following 
ways : 

1.     Through  selling  trips.     2.  Through  selling  agents  domi- 


94  INTERNATIONAL  COMMERCE 

ciled  in  the  importing  country.  3.  Through  sales  branches  lo- 
cated in  the  importing  country,  or  through  members  of  the  firm 
taking  up  residence  in  the  importing  country  for  the  purpose 
of  attending  to  sales.    4.  Through  correspondence  and  publicity. 

1.  One  of  the  most  practical  and  efficient  methods  of  in- 
itiating business  connections  with  buyers  in  the  importing  coun- 
thy  is  through  undertaking  selling  trips.  This  medium  has  its 
limitations  in  its  comparative  expensiveness,  while  certain  coun- 
tries also  impose  taxes  and  restrictions  upon  persons  traveling 
for  selling  purposes. 

Selling  journeys  are  undertaken  generally  with  the  aid  of 
samples  and  price  lists,  on  the  basis  of  which  orders  are  solicited. 
In  former  times  selling  trips  were  undertaken  by  men  who  car- 
ried the  actual  merchandise  with  them.  This  is  no  longer  done, 
excepting  in  the  case  of  expositions  and  fairs,  or  in  the  case  of 
valuable  goods  of  small  volume,  such  as  precious  stones,  jewelry, 
etc.  The  selling  trip  may  be  undertaken  by  the  head  of  the  sell- 
ing firm,  or  by  an  employee  or  by  an  agent. 

The.  greatest  prospect  of  success  have  selling  trips  under- 
taken by  heads  of  the  firm  or  by  employees  prominently  iden- 
tified with  the  management,  competent  to  negotiate  independ- 
ently in  the  matter  of  quotations,  concessions  and  conditions. 
This  is  true  particularly  of  the  initial  selling  trip  to  a  foreign 
market.  This  enables  the  head  of  the  firm  to  come  in  close  per- 
sonal contact  with  the  customer,  to  obtain  an  insight  into  the 
competition,  to  learn  the  needs  and  the  preferences  of  foreign 
localities.  It  also  aids  the  prestige  of  the  firm  with  the  cus- 
tomer. 

Usually,  however,  the  traveler  is  an  employee,  preferably 
connected  with  the  export  management,  and  as  a  rule  authorized 
to  act  for  the  firm  by  a  general  or  limited  power  of  attorney. 
Traveling  salesmen  are  paid  either  a  salary  and  expenses,  or  a 
salary,  commission  and  expenses,  or  a  commission  and  expenses. 
Selling  trips  are  also  undertaken  by  agents  who  may  travel  for 
one  or  more  exporter  or  manufacturer,  in  which  case  they  re- 
ceive a  commission  and  perhaps  a  pro-rata  contribution  to  their 
traveling  expenses. 

The  duties  and  the  tasks  of  a  traveling  salesman  in  export 
markets  are  varied,  difficult  and  important.     A  good  traveling 


Commercial  connections  95 

salesman  is  expected  to  be  familiar  with  the  territory  which  he 
is  to  visit;  to  know  the  firms  active  there  and  their  standing; 
the  market  conditions,  the  demand  for  his  line  and  the  current 
prices.  His  knowledge  of  these  conditions  is  particularly  im- 
portant in  case  he  travels  for  a  general  export  house,  for  he  is 
responsible  for  the  assortment  of  samples  which  he  must  carry, 
and  this  must  be  both  comprehensive  and  suitable  for  the  mar- 
ket. He  must  possess  a  good  technical  knowledge  of  his  goods. 
He  must  speak  the  language  of  his  customer  without  being  forced 
to  resort  to  the  services  of  an  interpreter.  He  must  have  a  good 
general  knowledge  of  business,  be  presentable,  self-reliant  and 
courteous,  persevering  and  correct  in  his  living  habits.  Particular- 
ly difficult  is  his  task  when  he  enters  a  foreign  market  for  the 
first  time  and  when  his  firm  and  its  products  are  unknown  in 
the  market  in  question.  He  must  have  the  ability  of  quickly 
ascertaining  the  entire  trade  available  for  his  canvassing  efforts, 
and  it  may  happen  that  this  first  trip  may  be  educative  and  in- 
formative only,  and  though  the  results  attained  may  be  small, 
they  may  form  the  basis  of  a  more  efficient  and  successful  at- 
tempt the  next  time.  It  is  a  mistake  to  be  discouraged  by  such 
initial  failure,  without  utilizing  the  experience  gained  in  correct- 
ing the  defects  and  faults  which  may  have  characterized  the  first 
trip. 

2.  The  selling  agent  domiciled  in  the  importing  country, 
next  to  the  traveling  salesman  is  a  very  important  link  in  the 
exporting  organization.  Without  agents  in  the  export  field  ex- 
port business  is  very  difficult.  Agents  are  needed  even  where 
traveling  salesmen  make  periodical  or  occasional  selling  trips. 
A  traveling  salesman  may  attain  good  results  during  his  sojourn 
in  a  foreign  market,  but  with  his  departure  there  comes  a  slump 
unless  a  resident  agent  continues  to  work  the  field.  The  agent's 
services  are  necessary  when  the  goods  arrive,  particularly  in  the 
case  of  credit  extension  to  foreign  customers,  when  it  is  advisable 
to  have  a  watchful  interest  in  a  debtor.  In  some  markets  where 
the  credit  problem  is  especially  acute  this  is  of  great  importance, 
unless  the  exporter  limits  himself  to  dealing  with  first  class  im- 
porters only.  The  particular  market  may  be  one  where  the 
volume  of  business  does  not  warrant  the  expense  of  sending  a 
traveling  salesman.     An  agency  arrangement  as  a  rule  does  not 


96  INTEKNATIONAL  COMMEKCE 

involve  expenditure  and  provides  a  means  for  a  regular  though 
perhaps  somewhat  limited  volume  of  business  in  a  given  locality. 

Agents  are  generally  apointed  in  important  commercial  cen- 
ters of  the  importing  country,  which  permits  their  serving  a  large 
circle  of  customers  economically.  This  is  particularly  important 
in  markets  where  the  customers  are  native  jobbers  or  large  re- 
tailers. But  where  the  customers  are  great  importing  houses, 
which  are  anyway  an  existing  link  in  the  organization  of  the 
international  commerce,  the  services  of  an  agent  are  less  nec- 
essary, and  to  dispense  with  the  agent  means  a  saving  of  his  com- 
mission. Customers  of  this  class  are  less  influenced  by  per- 
sonal calls  and  are  used  to  and  equipped  for  purchasing  at  long 
range,  and  since  it  is  not  usual  to  operate  with  many  such  firms 
in  one  commercial  center,  it  is  not  difficult  or  unduly  expensive 
to  keep  them  provided  with  samples,  quotations,  etc.  Such  im- 
porting firms  in  fact  do  not  care  to  buy  from  or  through  agents. 
Indeed  they  frequently  partake  of  the  character  of  agents  in  re- 
lations to  the  exporters. 

The  selection  of  suitable,  reliable  and  competent  agents  is 
a  very  difficult  matter.  The  further  distant  a  foreign  point  is, 
the  better  qualified  should  be  the  agent,  because  the  difficulty  of 
controlling  him  is  increased  by  so  much.  There  are  many  mar- 
kets where  it  is  utterly  inadvisable  to  use  the  services  of  a  native 
as  agent.  In  many  markets  native  firms  which  solicit  agencies 
are  very  irresponsible.  They  may  be  unreliable  in  the  selection 
of  their  customers  or  in  other  ways  objectionable.  Foreigners 
engaged  in  business  in  markets  where  such  conditions  prevail 
are  either  prevented  by  other  arrangements  from  accepting  ad- 
ditional agencies,  or  are  too  busy  to  do  justice  to  them.  They 
frequently  lack  the  requisite  technical  knowledge  to  handle  cer- 
tain lines.  It  will  be  therefore  the  task  of  a  careful  exporter 
to  use  the  greatest  diligence  in  securing  and  appointing  agents 
in  those  markets  where  an  agent's  activity  appears  desirable  and 
in  supplementing  the  efforts  of  the  agents  by  periodical  visits 
of  traveling  salesmen  or  members  of  the  firms. 

3.  The  most  efficient  method  of  selling  abroad  is  through 
installing  branch  establishments  abroad.  It  may  be  a  selling 
office  with  stock  sold  to  the  trade,  that  is  a  wholesale  establish- 
ment, or  in  some  lines  it  may  be  a  retail  business  or  a  combina- 


COMMERCIAL  CONNECTIONS  97 

tion  of  both.  A  retail  establishment  is  only  feasible  in  such 
populous  foreign  centers  where  a  large  retail  demand  exists  for 
the  goods  in  question.  This  may  be  done  in  such  articles  as 
typewriters,  sewing  machines,  automobiles,  etc.  Or  at  least  the 
consumers  must  be  of  an  advanced  stage  of  civilization,  ac- 
customed to  European  and  American  selling  methods  and  to 
trained  salesmen.  Thus  it  has  been  found  feasible  to  do  both 
a  wholesale  and  a  retail  shoe  business  in  American  shoes  in  many 
foreign  cities  in  direct  branch  establishments  of  American 
manufacturers.  European  exporters  maintaining  branch  estab- 
lishments in  certain  colonial  markets  combine  the  character  of 
wholesale  trading  with  the  retail  trade  in  these  branches. 

The  head  of  a  .foreign  branch,  in  view  of  the  distance  and 
difficulty  of  communicating  quickly  with  the  parent  house,  must 
have  thorough-going  powers,  which  presupposes  integrity  and 
competence  on  the  part  of  the  branch  manager  and  confidence 
of  the  parent  establishment.  It  is  the  practice  among  European 
exporters  to  have  such  important  branches  under  the  manage- 
ment of  one  of  the  partners,  but  in  American  usage  the  directors 
of  the  corporation  generally  appoint  a  qualified  man  from  the 
ranks  of  the  home  organization  to  take  charge  of  the  foreign 
office.  The  British  custom  has  been  until  recently  to  give  the 
branch  manager  an  interest  in  the  firm  and  to  consider  him  a 
"salaried  partner." 

The  foreign  branch  establishment  in  American  usage  may 
be  conducted  as  part  and  parcel  of  the  parent  enterprise  or  a 
special  company  may  be  formed  to  conduct  it.  In  European 
usage  it  is  general  to  consider  the  foreign  branch  as  property 
of  the  parent  house,  or  to  form  a  special  co-partnership,  or  a 
limited  liability  company,  with  the  parent  house  interested  to  the 
extent  of  a  limited  investment.  The  principals  of  the  branch 
establishment  then  accept  some  of  their  higher  employees  as  co- 
workers, allowing  them  to  sign  for  the  firm  "per  procuration." 
This  is  the  practice  of  most  German  exporters  having  branch 
establishments  in  oversea  markets  as  well  as  of  many  British 
firms. 

The  loosest  sort  of  a  connection  with  a  foreign  establish- 
ment, a  connection  which  can  hardly  be  termed  as  maintaining 


58  INTEKNAT10NAL  COMMERCE 

a  foreign  branch,  is  found  in  the  British  system  of  "support  ac- 
counts." 

The  exporter  facilitates  the  creation  of  a  business  house  in 
a  specified  foreign  market  by  obligating  himself  to  grant  it  a  spe- 
cified credit,  while  the  foreign  establishment  gives  a  bond  not 
to  purchase  any  goods  excepting  through  the  export  house  in 
question. 

A  branch  establishment  abroad  assumes  to  a  certain  extent 
the  character  of  an  importer.  Certainly  purchases  of  native 
houses  from  the  foreign  sales  branch  cannot  be  considered  as 
direct  import,  unless  the  sales  branch  merely  forwards  the  order 
tc  the  parent  establishment  and  the  goods  are  shipped  from  the 
parent  establishment  direct  to  the  customer. 

4.  Correspondence  and  publicity.  The  low  level  of  civil- 
ization and  commercial  morality  which  prevails  in  many  markets 
limits  business  getting  by  correspondence  to  European  and 
American  firms  in  certain  localities,  while  there  are  also  high 
grade  native  firms  which  must  be  distinguished  from  those  which 
are  undesirable  as  a  direct  connection  and  require  constant  control 
and  watching  by  a  resident  agent  or  a  branch  establishment. 
The  length  of  time  consumed  in  correspondence  makes  it  fre- 
quently difficult  for  the  buyer  and  the  seller  to  come  to  an  agree- 
ment within  a  reasonable  time.  Cabling  is  expensive  and  is  on 
account  of  the  brevity  of  the  message  not  a  fully  satisfactory 
substitute  for  a  letter.  This  leads  the  exporter  to  the  tendency 
of  concentrating  his  cabling  communications  to  few  constant 
and  regular  connections. 

The  question  of  quality  of  the  goods  in  doing  business  at 
long  range  is  determined  by  the  use  of  certain  grade  designa- 
tions sanctioned  through  commercial  usage,  by  description  and  by 
sending  of  samples.  If  none  of  these  three  methods  suffice,  it  is 
impossible  for  the  buyer  and  seller  to  come  to  any  agreement 
on  the  point  of  quality  by  correspondence.  It  is  customary  in 
such  cases  to  send  samples,  or  specimens  of  the  goods  to  an  agent 
of  a  branch  establishment  a  sufficient  time  in  advance  of  the 
actual  conclusion  of  business,  and  refer  to  same  in  correspond- 
ence. 

As  a  means  of  extending  business  with  an  individual  house 
correspondence  alone  is  inadequate,  particularly  if  competitors 


COMMERCIAL  CONNECTIONS  99 

have  traveling  or  resident  agents  actively  soliciting  business. 
Only  when  the  market  is  far  enough  from  the  beaten  path,  or 
when  there  is  a  specially  intimate  connection  between  the  seller 
and  the  buyer,  may  the  exporter  content  himself  with  corres- 
pondence as  a  means  of  soliciting  the  business  of  his  foreign 
customer. 

But  as  a  means  of  campaigning  for  new  business,  corres- 
pondence in  the  form  or  circularization  is  a  particularly  effective 
weapon  if  used  with  good  judgment.  It  should  be  accompanied 
by  the  judicious  use  of  modern  publicity  as  suitable  both  for 
the  goods  sold  and  for  the  market  and  class  of  customers  it  is 
desired  to  reach.  Publicity  may  include  advertising  in  export 
journals,  advertising  in  foreign  publications,  the  sending  out  of 
market  reports,  periodical  price  lists  and  house  organs  with  the 
proper  method  of  following  up  such  efforts.  Circularization 
and  publicity  should  be  employed  the  more  actively  the  closer 
to  general  consumption  is  the  demand  for  the  goods  it  is  desired 
to  sell  and  the  broader  are  the  strata  of  the  trading  community 
that  purchase  and  distribute  them.  The  principles  underlying 
the  correct  methods  of  publicity  in  foreign  countries  could  well 
form  the  basis  for  a  special  volume.  It  may  be  briefly  noted, 
however,  that  it  must  be  suited  to  the  reading  and  marketing 
habits  of  the  class  of  trading  community  in  a  given  locality 
which  it  is  desired  to  reach.  Thus  in  some  community  advertis- 
ing in  the  local  press  may  yield  good  results,  in  another  a  liberal 
use  of  billboards,  still  in  another  the  employment  of  high  grade 
catalogs.  The  text  of  the  circular,  the  advertisement,  the  bill- 
board must  be  most  competently  prepared  by  a  person  with  a 
thorough  knowledge  of  the  article  to  be  advertised  and  the 
circle  of  buyers  it  is  desired  to  reach.  The  language  of  the 
country,  or  the  language  best  understood  by  its  business  com- 
munity should  be  used.  Quotations  and  delivery  terms  must  be 
given  so  as  to  have  a  definite  meaning  for  the  parties  interested. 
The  illustrations  must  be  adapted  to  the  mental  development  of 
the  classes  of  readers  for  whom  they  are  designed.  A  detailed 
discussion  of  the  problem  of  export  publicity  from  the  point  of 
view  of  the  American  exporter  is  given  in  Chapter  XX. 


CHAPTER  VI. 
I.    The  Organization  of  the  Export  Trade  (concluded.) 

C.      THE  ORGANIZATION  IN  THE  IMPORTING  COUNTRY 
OVERSEAS. 

I.     Oversea  Importers  Classified. 

In  its  widest  sense  the  term  importer  includes  all  those  who 
either  acting  for  own  account  or  for  others  receive  goods  ship- 
ped from  abroad  involving  rights  and  obligations  towards  par- 
ties located  in  the  country  of  export  or  an  account  relationship 
with  a  parent  or  branch  establishment  in  the  country  of  export. 

In  this  sense  the  term  importer  would  apply  also  to  those 
who  import  goods  for  their  own  consumption,  as  manufactur- 
ing enterprises  importing  raw  products  needed  in  their  manufac- 
turing operations;  and  if  a  manufacturer  establishes  a  selling 
branch  abroad,  that  selling  branch  would  be  engaged  in  import- 
ing, though  it  may  not  handle  goods  other  than  manufactured 
by  its  parent  establishment. 

In  a  stricter  application  the  term  importer  is  applied  to  a 
merchant  who  in  the  course  of  business  currently  introduces 
goods  of  foreign  origin  into  his  home  country  and  undertakes 
their  distribution. 

Under  this  stricter  definition  we  distinguish  two  groups  of 
importers,  first  wholesalers  and  retail  dealers  of  the  same  kind 
as  are  engaged  in  the  domestic  trade;  these  are  generally  in- 
terested in  the  importation  of  specific  classes  of  merchandise 
(though  oversea  department  stores  which  fall  into  this  group 
furnish  an  example  of  importers  handling  a  wide  range  of 
goods),  maintaining  stocks  of  merchandise  and  distributing 
their  imports  among  inland  buyers  from  stock.  This  group  of 
importers  makes  purchases  of  goods  abroad  merely  because  a 
given  class  of  merchandise  cannot  be  obtained  as  advantageously 
from  home  producers.  The  second  group  of  importers  include 
merchants  whose  sole  aim  of  activity  is  the  importation  of  for- 


OVERSEA  CONSUMERS  101 

eign  products,  and  who  as  a  rule  are  not  particular  about  the 
classes  of  goods  which  they  import.  This  last  group  are  import- 
ers in  the  strictest  sense  of  the  term,  and  as  they  handle  a  wide 
range  of  imported  products  it  is  customary  to  call  them  "gen- 
eral importers."  General  importers  seldom  maintain  stocks  of 
goods.  They  import  as  a  rule  from  countries  and  markets  from 
which  their  customers  cannot  conveniently  import  direct  on  ac- 
count of  difficulties  involved.  Their  customers  generally  are 
producers  and  wholesale  merchants. 

2.     Oversea  Consumers  as  Direct  Customers  of  Ex- 
porters and  Manufacturers. 

Whereas  in  the  great  manufacturing  countries  large  indus- 
trial enterprises  very  frequently  cover  their  requirements  of  raw 
products  and  other  supplies  which  are  not  obtainable  from  the 
home  production  by  importing  them  direct  from  abroad,  in  other 
words  appear  as  direct  importers  of  foreign  products  for  self- 
consumption,  this  tendency  is  less  evident  in  the  oversea  markets 
which  we  have  under  consideration  in  connection  with  the  ex- 
port of  manufactured  goods  from  the  industrial  countries  of 
Europe  and  America  to  the  essentially  importing  countries  which 
constitute  what  is  termed  by  the  essentially  exporting  countries 
their  "export  field." 

In  these  essentially  importing  countries  industrial  enter- 
prises do  not  occupy  the  economically  important  position  of  in- 
dustrial enterprises  of  the  manufacturing  countries  and  they  de- 
pend very  largely  for  their  supply  of  raw  products  upon  do- 
mestic sources.  When  compelled  to  purchase  foreign  raw  pro- 
ducts, tools  or  machinery  they  may  find  that  the  exporting  manu- 
facturers or  merchants  prefer  to  sell  them  through  import- 
ers located  in  the  importing  country,  particularly  in  the  case 
of  delivery  contracts  involving  conventional  fines,  guarantees, 
etc.  In  many  instances  it  is  customary  for  the  seller  to  under- 
take the  erection  of  machinery  sold  to  such  enterprises,  and  it 
is  then  desirable  to  have  a  technically  trained  agent  or  represen- 
tative on  the  spot.  In  dealing  with  these  consumers  it  is  cus- 
tomary to  sell  direct  only  when  every  safeguard  has  been  ob- 
served, and  in  fact  these  importing  consumers  themselves  pre- 


102  INTERNATIONAL  COMMERCE 

fer  to  deal  with  someone  responsible  on  the  spot  who  can  im- 
mediately act  in  the  case  of  complaints. 

Other  consumers  in  the  importing  countries  who  import  pro- 
ducts for  their  own  use  are  large  plantations,  railroads  and 
mining  enterprises  which  buy  machinery,  supplies  and  stores. 
Many  of  these  have  their  own  buying  offices  in  the  United  States 
and  Europe.  In  the  case  of  plantation  and  sometimes  of  min- 
ing enterprises  these  purchasing  offices  are  combined  with  the 
sales  offices  for  the  sale  in  the  United  States  and  in  Europe  of 
their  own  production. 

Only  the  smaller  planters  are  called  upon  to  buy  their  sup- 
plies through  importers  at  home.  But  a  good  agency  can  fre- 
quently secure  the  business  of  many  of  the  larger  and  the  smaller 
enterprises  of  this  character  by  being  on  the  spot  and  by  being 
able  to  show  samples  and  catalogs  and  to  make  direct  offers  to 
the  technical  management. 

In  connection  with  the  role  of  foreign  consumers  as  cus- 
tomers we  must  not  overlook  governments,  state  administrations 
and  municipalities.  In  many  markets  these  public  bodies  are 
very  large  buyers.  Frequently  they  operate  railways,  tramways 
or  industrial  monopolies.  They  cover  their  requirements  either 
by  inviting  public  bids,  or  they  may  turn  over  the  purchasing 
to  importers,  either  foreign  or  national,  or  they  may  send  pur- 
chasing commissions  to  exporting  manufacturing  countries.  Local 
customs  govern  dealings  with  this  class  of  customers,  and  each 
country  presents  its  own  problems  which  may  vary  from  the 
freest  competition  strictly  on  the  merits  of  the  proposition  to 
more  or  less  involved  proceedings  in  which  a  conscientious  for- 
eigner either  cannot  or  will  not  participate. 

In  certain  oversea  markets  religious  missions  of  various 
denominations  are  an  economic  factor  from  the  point  of  view 
of  import.  In  many  places  they  have  been  the  pioneers  of  for- 
eign trade,  but  while  German  religious  missions  have  been  lately 
much  criticised  for  using  their  ostensible  spiritual  calling  as  a 
cloak  for  commercial  or  even  for  sinister  activities,  other  organ- 
izations of  this  character,  which  more  nearly  approach  the  ideal, 
are  factors  of  commercial  importance  to  the  extent  of  exercising 
a  generally  civilizing  influence  in  indirectly  developing  a  demand 


OVERSEA  WHOLESALERS 

for  foreign  goods  and  establishing  through  their  prestige  a  cer 
tain  favorable  soil  for  future  commercial  activities  of  their  na- 
tionals, as  the  influence  of  Roberts  College  in  Constantinople 
which  has  indirectly  prepared  a  favorable  disposition  towards 
American  customs  and  products  in  the  Near  East. 

3.  Oversea  Wholesalers,  Jobbers  and  Retailers  as  Direct 
Customers  of  Exporters  and  Manufacturers  and  as 
Customers  of  Oversea  Importers  Properly  Speaking. 

Retail  dealers  in  foreign  markets  are  only  rarely  suitable 
customers  for  exporting  manufacturers  and  exporters.  They  are 
as  a  rule  better  advised  to  buy  from  importers  and  wholesalers 
in  the  nearest  importing  center.  An  exception  may  be  in  the 
case  of  exporting  manufacturers  who  make  a  practice  of  selling 
to  retailers  at  home,  as  for  instance  manufacturers  of  inks  and 
stationery,  in  which  line  business  is  done  in  small  and  frequent 
shipments.  This  is  true  particularly  in  markets  that  are  not  too 
distant  or  difficult  of  control,  and  in  goods  suitable  for  retail 
distribution  without  further  manipulations.  In  certain  markets, 
such  as  the  Near  East,  the  European  manufacturers  make  a 
practice  of  canvassing  the  retail  trade  in  a  variety  of  lines,  and 
a  similar  condition  prevails  in  Mexico  as  far  as  American  manu- 
facturers of  certain  commodities  are  concerned.  It  must  not  be 
forgotten,  however,  that  retailers — outside  of  the  great  depart- 
ment stores,  which  here  may  be  ignored  because  as  a  rule  they 
have  their  own  purchasing  organization  and  buyers  wherever 
they  draw  considerable  supplies,  and  besides  this  class  of  estab- 
lishments is  not  as  common  in  the  oversea  markets  as  it  is  in 
the  United  States — are  financially  a  weaker  class  of  customers, 
more  easily  affected  by  disturbing  factors  of  passing  nature,  less 
accustomed  to  dealings  with  foreign  suppliers  than  with  whole- 
salers and  general  importers  in  the  import  centers  of  their  home- 
land, and  finally  they  buy  smaller  quantities  of  individual  articles 
than  the  wholesaler  or  the  importer.  On  the  other  hand  retailers 
are  prepared  to  pay  better  prices.  If  an  exporting  manufac- 
turer sells  in  the  same  market  to  wholesalers  and  to  retailers  he 
must  protect  the  former  by  giving  them  lower  quotations  or  spe- 
cial discounts. 


104  INTERNATIONAL  COMMERCE 

Ordinary  jobbers  or  wholesalers  as  customers  for  manufac- 
tured products  may  be  regarded  under  two  headings,  European 
and  oversea  wholesalers.  In  Europe  foreign  manufactured  pro- 
ducts are  as  a  rule  imported  by  wholesalers  and  jobbers  exactly 
of  the  same  class  as  handle  domestic  manufactured  products. 
A  British  wholesale  dealer  in  ironmonger  ware  will  buy  Amer- 
ican or  French  hardware  as  merchant  for  his  own  account,  and 
such  merchants,  though  they  do  incidentally  an  import  business, 
are  not  considered  properly  importers,  unless  they  specialize  in 
manufactured  goods  from  foreign  countries,  such  as  American 
office  supplies,  or  French  silks,  or  imported  toys. 

Overseas,  however, — referring  to  the  essentially  non-indus- 
trial and  importing  countries,  considerable  differences  in  thu 
status  of  wholesalers  and  jobbers  are  encountered,  dependeni 
upon  the  distance  from  European  and  American  sources  of  sup- 
ply, upon  the  cultural  development  of  the  country  and  of  its 
people,  upon  the  nationality  of  the  wholesale  distributors  of  im- 
ported manufactured  goods  to  the  retail  trade,  as  well  as  upou 
the  various  factors  which  affect  the  development  of  the  repre- 
sentation of  foreign  manufacturers  and  exporters  in  the  par- 
ticular oversea  market. 

Naturally  enough,  if  the  oversea  market  is  relatively  close 
to  the  exporting  country  the  foreign  manufacturer  and  exportc 
can  enter  more  readily  into  direct  connections  with  the  ordinan 
wholesaler  in  the  importing  country.  Correspondence  may  bi* 
exchanged  swiftly,  samples  may  be  sent,  purchasing  and  selling 
trips  are  relatively  inexpensive  and  easy  of  accomplishment.  It 
is  easier  to  sell  to  a  wholesaler  in  Canada  than  in  Brazil. 

A  still  more  important  factor  is  whether  the  ordinary  whole- 
sale distributor  in  an  oversea  market  is  from  the  point  of  view 
of  education  and  commercial  training  fit  to  enter  into  a  long 
range  business  with  a  European  or  American  manufacturer  or 
exporter.  There  are  gradations  even  in  under  this  point  of  view. 
A  native  wholesaler  may  not  be  capable  of  entering  into  con- 
nections with  a  manufacturer  or  exporter  in  a  distant  country, 
but  may  be  safe  enough  to  do  business  with  through  a  traveling 
salesman  or  agent,  or  he  may  be  totally  unfit  for  such  direct 
business  connections  at  long  range,  and  then  he  must  deal  ex- 


OVERSEA  WHOLESALERS  106 

clusively  with  local  importers  or  local  branches  of  foreign  con- 
cerns. 

The  extent  to  which  the  trade  of  native  wholesalers  and 
jobbers  may  be  cultivated  by  means  of  agents  representing  the 
foreign  manufacturer  or  exporter  direct  depends  not  only  upon 
the  two  factors  just  mentioned,  but  also  upon  others.  Is  the 
native  wholesale  trade  inclined  to  order  goods  for  future  de- 
livery ?  Is  the  market  important  enough  from  the  point  of  view 
of  turnovers  to  assure  sufficient  earning  capacity  to  the  agency 
enterprise?  Are  the  payment  practices  and  credit  requirements 
favorable?  For  in  case  these  are  not,  the  foreign  manufacturer 
and  exporter  must  place  an  exceptional  amount  of  confidence 
in  the  agent  with  regard  to  the  choice  and  the  control  of  cus- 
tomers, and  these  latter  elements  are  a  retarding  factor;  more- 
over in  some  markets  the  native  trade  is  traditionally  given  to 
the  tendency  of  squirming  out  of  the  fulfilment  of  obligations  in 
the  event  of  unfavorable  market  changes.  Again  the  foreign 
manufacturer  and  exporter  will  have  to  be  sure  of  adequate 
banking  connections  for  the  effecting  of  collections,  as  it  is  fre- 
quently inadvisable  to  leave  these  to  the  agent;  finally  an  im- 
portant factor  is  whether  it  is  possible  to  exchange  detailed  com- 
munications with  the  agent  quickly  and  inexpensively. 

Where  the  exporter  in  the  strictest  sense  of  the  term  (a  mer- 
chant for  his  own  account  whose  business  is  predominantly  based 
upon  the  export  of  manufactured  goods  to  oversea  markets) 
seeks  out  and  solicits  customers  of  his  own  initiative,  that  is 
where  he  does  not  act  as  a  middleman  in  making  purchases  for 
his  oversea  connections  or  a  grantor  of  credit,  he  will  endeavor 
to  do  business  with  ordinary  wholesalers  and  jobbers  wherever 
local  conditions  permit  him  to  do  so  rationally,  particularly  when 
he  can  reach  the  ordinary  wholesale  trade  with  the  aid  of  sales 
agents.  He  will  endeavor  to  do  so  in  preference  to  selling  to 
importers  in  the  strictest  sense  of  the  term. 

The  exporting  manufacturer,  however,  will  find  the  difficul- 
ties and  the  risk  of  dealing  with  ordinary  wholesalers  and  job- 
bers in  oversea  markets  so  great  that  outside  of  those  countries 
which  have  advanced  in  culture  so  far  as  to  possess  a  trained 
wholesale  trading  community   competent  to  enter  into   a   long 


106  INTERNATIONAL  COMMERCE 

range  business  with  Europe  and  America,  he  will  prefer  to  en- 
ter into  business  connections  with  importers  in  the  strictest  sense 
of  the  term  for  the  cultivation  of  oversea  markets. 

The  oversea  importer  in  the  smciest  sense  of  the  term,  that 
is  the  merchant  engaged  exclusively  in  the  import  of  foreign 
merchandise  of  all  kinds,  is  an  intermediate  link  in  international 
commerce  between  the  exporter  in  the  widest  aspect  of  the  word 
on  the  one  hand  and  the  native  wholesale  distributor  or  jobber 
in  the  importing  country  on  the  other.  The  general  importer  as 
a  rule  sells  almost  exclusively  to  wholesalers  in  the  territory  in 
which  he  is  located,  though  he  will  also  endeavor  to  furnish 
supplies  to  large  consumers  and  to  public  bodies.  Selling  to 
retailers  or  to  smaller  tradespeople  is  more  or  less  of  an  excep- 
tion and  is  found  only  where  the  proper  basis  for  the  business 
of  a  general  importer  is  lacking  or  commencing  to  vanish. 

The  oversea  importer  in  the  strictest  sense  of  the  term  me- 
diates import  business  from  countries  with  which  the  ordinary 
native  wholesaler  either  cannot  or  will  not  enter  into  direct  con- 
nections. Taking  China,  for  instance,  where  the  native  community 
is  passive  from  the  point  of  view  of  international  commerce,  for- 
eign general  importers  rule  not  only  the  import  from  exporting 
countries  outside  of  the  Far  East,  but  even  from  Asiatic  coun- 
tries. The  import  trade  here  is  generally  in  the  hands  of 
European  and  American  firms,  particularly  as  far  as  the  import 
from  United  States  and  Europe  is  concerned.  But  here  Japanese 
merchants  act  as  importers  for  Japanese  products,  and  Hindu 
merchants  as  importers  of  India  products. 

The  basis  for  the  development  of  the  business  of  such  im- 
porters (called  general  importers  because  of  the  wide  range  of 
products  which  they  handle)  is  most  favorable  where  the  na- 
tive wholesale  trade  is  not  in  a  position  to  attend  to  importing 
direct.  For  this  reason  Europe  is  lacking  largely  in  houses  spe- 
cializing in  the  import  of  manufactured  products  for  the  dis- 
tribution among  wholesalers,  because  these  can  well  do  their  own 
importing.  There  is,  however,  in  Europe  a  large  class  of  com- 
mission merchants  who  take  up  the  import  of  foreign  manu- 
factured products  in  the  capacity  of  agents.  The  principal  field 
of  activity  for  importers  in  the  strictest  sense  of  the  term  is  in 


OVERSEA  IMPORTING   ANALYZED  107 

territories  where  the  local  trade  is  not  equipped  for  importing 
direct  from  distant  countries,  as  for  instance  in  most  Asiatic 
countries,  in  South  Sea  Islands,  in  West  Africa,  in  the  Levant. 
In  other  foreign  markets  the  position  of  the  importer  properly 
speaking  depends  upon  the  extent  to  which  the  wholesale  trade 
has  developed  direct  connections  with  exporting  countries. 

Just  as  general  exporters,  general  importers,  being  importers 
in  the  strictest  sense  of  the  term,  do  not  exclude  any  merchan- 
dise from  their  activity,  but  occasionally  limit  themselves  to 
countries  whose  products  they  import.  Even  among  whole- 
salers in  many  overseas  markets  there  is  frequently  lacking  a 
specialization  by  classes  of  merchandise,  such  as  is  the  rule  in 
highly  developed  industrial  countries.  Nevertheless  in  recent 
years  there  has  grown  up  a  certain  specialization  among  im- 
porters, such  as  import  of  machinery  and  engineering  supplies, 
import  of  textiles,  or  import  of  chemicals,  oils,  etc.  In  that 
case  the  distinction  between  such  importers  and  wholesalers  is 
found  in  the  fact  that  importers  properly  speaking  either  do 
not  carry  stocks  and  sell  to  wholesalers  only,  or  in  those  rare 
cases  when  they  do  carry  stocks,  they  still  limit  their  business 
to  the  wholesale  trade  in  their  territory,  apart  from  sales  to  pub- 
lic institutions  and  certain  big  producers  and  consumers.  The 
business  of  these  importers  finds  its  characteristic  in  supplying 
foreign  goods  for  the  wholesale  trade.  This  is  noticeable  in  the 
import  trade  of  the  United  States,  the  importers  specializing 
in  certain  commodities  and  finding  their  customers  principally 
among  domestic  wholesale  distributors. 

In  the  countries,  however,  in  which  the  domestic  wholesale 
trade  has  learned  to  an  increasing  degree  to  import  direct  from 
abroad,  the  importer  properly  speaking  begins  to  compete  with 
the  wholesale  trade  and  acts  as  a  distributor  to  retailers  and 
small  jobbers  in  the  inland  points.  This  occurs  to  a  growing 
degree  in  South  American  countries. 

4.    Analysis  of  the  Activities  of  Oversea  Importers. 

The  importer  in  the  strictest  sense  of  the  term,  being  the 
counterpart  of  the  exporter  in  the  strictest  sense  of  the  term, 
can  be  a  merchant  for  his  own  account  or  conduct  his  business 


108  INTERNATIONAL  COMMERCE 

on  a  commission  basis.  His  business  may  be  like  that  of  the 
exporter  in  the  collection  of  orders  to  purchase  goods.  In  this 
case  he  is  a  buying  commission  merchant,  or  an  indent  mer- 
chant. 

Though  these  importers,  for  reasons  which  we  will  enume- 
rate below,  are  increasingly  inclining  to  do  business  as  merchants 
for  own  account,  frequently  they  conclude  even  such  business 
as  buying  commissioners,  as  in  the  case  of  indents,  of  which 
more  will  be  said  later  on. 

Importers  in  oversea  markets  avoid,  as  far  as  they  can,  the 
importation  of  goods  before  having  effected  a  sale,  because  of 
the  risk  of  market  fluctuations  by  the  time  such  goods  arrive, 
although  they  realize  that  goods  on  the  spot  may  not  only  be 
more  quickly  sold,  but  also  at  better  prices  than  goods  for  future 
delivery.  Sometimes,  however,  circumstances  force  them  to  im- 
port goods  before  they  have  sold  them,  the  assurance  of  better 
prices  which  they  can  secure  lessening  the  risk  of  loss. 

In  certain  markets,  where  a  system  of  barter  still  exists, 
goods  must  be  imported  by  importers  before  they  are  sold  in  the 
country  of  importation.  In  these  smaller  markets  the  element 
of  competition  is  as  a  rule  less  pronounced  and  the  danger  of 
fluctuation  less  imminent.  Even  in  more  important  markets  the 
danger  of  fluctuation  is  less  pronounced  in  the  case  of  staple 
goods,  such  as,  for  instance,  so-called  "Manchester  goods"  cur- 
rently sold  in  Eastern  Asia.  But  even  in  the  case  of  goods  pre- 
viously sold  in  some  markets  the  importer  is  not  free  from  risk, 
because  sometimes  the  native  trade  is  apt  in  the  case  of  suddenly 
occuring  deterioration  of  market  conditions  to  go  back  on  its 
word  and  to  refuse  the  acceptance  of  the  goods.  Then  the  im- 
porter may  prefer  to  import  goods  before  they  are  sold  and  to 
draw  such  advantages  from  having  goods  in  stock  as  the  mar- 
ket situation  may  afford,  being  thus  more  or  less  independent 
of  the  whims  of  customers.  In  markets  where  such  conditions 
do  not  prevail  the  importer  may  be  sometimes  induced  by  a  spir- 
it of  speculation  to  import  goods  before  having  sold  them,  or 
the  visit  of  a  chance  traveling  salesman  may  have  provided  him 
with  a  special  offer  inducing  him  to  take  a  so-called  "flyer." 
While  substantially  the  character  of  the  importer's  activity 


OVERSEA  IMPORTING   ANALYZED  109 

is  that  of  a  buying  commissioner,  the  importer  properly  speak- 
ing seldom  carries  on  his  business  on  the  basis  of  a  buying  com- 
mission on  percentage.  His  reasonable  desire  to  draw  as  much 
profit  as  possible  from  his  activity  precludes  this.  The  ordinary 
percentage  basis  of  such  deals  does  not  sufficiently  appeal  to 
him,  particularly  as  he  sells  to  his  trade  on  the  basis  of  delivery 
at  the  customer's  place  of  business  and  in  the  local  currency, 
whereas  his  purchase  is  placed  in  the  currency  of  the  exporting 
country,  frequently  at  the  mill  or  factory,  and  freight  and  in- 
surance are  fluctuating  elements  for  which  he  cannot  always 
provide  in  his  contract  with  his  customer.  Neither  do  the  cus- 
tomers as  a  rule  attach  too  much  importance  to  the  percentage 
commission,  as  it  is  difficult  for  them  to  control  the  actual  prices 
paid  by  the  importer,  for  even  the  receipt  of  an  invoice  copy  is 
not  an  essential  means  of  verification. 

As  a  selling  commissioner  the  importer  may  receive  instruc- 
tions from  an  exporter  in  the  exporting  country  to  conclude 
business  on  the  basis  of  samples,  catalogs,  price  lists,  etc.,  or  he 
may  receive  consignments  of  goods  for  sale.  The  first  relation- 
ship is  not  very  frequent.  Without  the  assumption  of  the  del 
credere  guarantee  by  the  importer  the  exporter  would  prefer  an 
agency  relationship  to  the  selling  commission  relation,  because 
in  that  case  he  enters  into  direct  contact  with  the  buyers.  But 
if  the  importer  is  to  assume  risks  involved  in  the  del  credere 
arrangement  he  naturally  desires  a  greater  profit  than  is  open 
to  him  in  a  percentage  commission.  He  will  enter  into  such  an 
arrangement  only  if  the  exporters  will  not  deal  with  him  other- 
wise, on  account  perhaps  of  his  limited  financial  strength,  or  in 
case  he  attaches  a  particular  importance  to  the  securing  of  a 
representation  of  some  special  manufactured  product,  and  the 
manufacturer  in  question  desiring  to  exercise  a  controlling  in- 
fluence upon  the  sales  price  will  not  assent  to  any  other  but  a 
commission  arrangement.  But  even  exporters  attach  only  slight 
importance  to  a  commission  basis  arrangement  with  the  import- 
ers in  foreign  markets  because  of  the  difficulty  of  controlling 
prices  charged  to  customers  and  actually  paid  by  them. 

But  importers  in  oversea  markets  are  at  all  times  willing 
to  accept  goods  on  consignment.    This  enables  them  to  have  the 


110  INTERNATIONAL  COMMERCE 

benefit  of  spot  goods  without  the  risk  of  buying  them  on  specu- 
lation. The  exporter  by  sending  a  consignment  stock  has  the 
advantage  of  doing  spot  business  abroad  without  maintaining  a 
branch  of  his  own,  receiving  the  benefit  of  better  prices  attain- 
able thereby.  This  is  particularly  true  of  cases  when  neither 
the  customers  are  willing  to  buy  the  particular  goods  nor  the 
importers  to  import  them  in  the  unsold  condition,  as  in  the  case 
of  new  and  untried  lines.  The  consignment  proposition  is  from 
some  points  of  view  one  of  the  best  means  of  extending  exports, 
although  American  manufacturers  and  exporters  have  an  estab- 
lished prejudice  against  it. 

This  is  due  to  the  extraordinary  degree  of  risk  inherent  to 
the  consignment  business.  First,  there  is  for  the  consignor  the 
danger  that  the  market  situation  may  deteriorate  before  the 
goods  arrive  at  the  destination.  The  consignor  generally  is  less 
conversant  with  local  market  conditions  than  the  importer.  There 
is  the  danger  of  mistakes  of  judgment  and  intentional  misleading 
on  the  part  of  the  importer  to  the  detriment  of  the  consignor.  Once 
the  consigned  goods  have  arrived  at  destination,  they  are  difficult 
to  dispose  of  in  the  case  of  untoward  circumstances.  In  a  mar- 
ket close  at  hand  consigned  goods  may  be  easily  taken  back,  but 
transportation  costs  and  customs  duties  make  it  a  costly  experi- 
ment in  oversea  markets.  It  is  likewise  difficult  to  come  to  a  sat- 
isfactory arrangement  with  the  consignee  in  the  case  of  the  nec- 
essity of  altering  the  disposition  arrangements.  This  places  the 
consignor  into  the  hands  of  the  importer.  There  is  danger  of 
the  accumulation  of  warehousing,  insurance  and  other  charges, 
loss  of  interest,  risk  of  the  deterioration  of  goods.  Finally  there 
is  the  danger  of  unsold  consigned  goods  being  used  by  the  ulti- 
mate customers  to  exercise  pressure  upon  the  consignor  in  order 
to  secure  lower  prices.  In  the  case  of  current  consignments  it 
is  customary  to  demand  frequent  statements  of  stock  on  hand 
and  sales  effected. 

Occasionally  exporters  having  excessive  stocks  in  certain 
commodities  will  send  consignment  stocks  to  importers  in  whom 
they  place  special  confidence,  ordering  them  to  sell  as  best  they 
can,  but  very  generally  such  goods  are  sent  to  branches  of  banks, 
agencies  of  forwarding  houses,  etc.    Frequently  the  instructions 


OVEESEA  IMPORTING  ANALYZED  in 

are  to  sell  such  goods  at  auction,  as  in  the  case  of  lots  damaged 
in  transit,  etc. 

Even  as  an  exporter,  the  importer  may  act  sometimes  as 
buying  and  selling  commissioner  in  the  same  business  transac- 
tion. Doing  strictly  an  agency  business  is  somewhat  out  of  the 
range  of  an  importer's  activities.  The  importer,  as  a  counter- 
part of  the  exporter,  intervenes  as  a  middleman  in  international 
commercial  transactions,  partially  financing  them,  paying  the 
seller  in  the  exporting  country  the  value  of  his  goods  in  advance, 
frequently  at  the  time  of  shipment,  and  assuming  the  task  of 
credit  extension  to  the  customer.  Still  it  happens,  particularly 
in  the  case  of  importing  firms  of  weaker  financial  standing  that 
in  addition  to  import  proper  they  act  as  agents ;  while  importing 
firms  of  higher  standing  accept  agencies  only  in  dealings  with 
manufacturers  who  may  refuse  to  enter  into  relations  with  them 
on  any  other  basis. 

The  importer  may  get  his  goods  either  direct  from  the 
manufacturer  or  a  wholesaler  abroad  (the  latter  generally  in 
the  case  of  agricultural  produce  or  of  manufacturers  who  turn 
over  the  sale  of  their  output  entirely  to  middlemen)  or  indirectly 
through  general  exporters,  or  it  may  be  through  their  own  par- 
ent house  in  Europe  and  in  United  States.  The  former  is  not 
as  frequently  the  case  as  one  might  expect,  because  a  connec- 
tion with  a  general  exporter  offers  the  general  importer  certain 
advantages.  For  this  reason  general  importers  overseas  largely 
leave  the  buying  of  their  requirements  in  Europe  or  in  United 
States  to  a  general  exporter.  Even  when  they  give  their  orders 
to  a  traveling  salesman  they  frequently  stipulate  that  these  must 
be  first  "confirmed"  by  their  buying  house  or  parent  establish- 
ment in  Europe  or  in  United  States.  The  oversea  agents  of 
European  and  American  exporters  and  manufacturers  frequent- 
ly regard  importers  resident  overseas  as  their  competitors,  and 
the  latter  do  not  as  a  rule  for  that  reason  care  to  buy  from  the 
former.  Buying  from  manufacturers  either  for  their  own  ac- 
count or  on  commission  basis,  importers  frequently  establish  a 
sort  of  a  constructive  representation  arrangement,  endeavoring 
to  sell  the  manufacturer's  products  on  the  basis  of  samples, 
catalogs  and  price  lists.     In  that  case  they  occasionally  stipulate 


112  INTERNATIONAL  COMMERCE 

an  exclusive  right  to  represent  their  source  of  supply  in  their 
territory. 

General  importers  overseas  sell  usually  to  the  wholesale 
trade  in  their  territory.  This  is  almost  exclusively  true  in  Asia 
and  in  Africa — outside  of  South  Africa.  The  sale  from  the  im- 
porting center  to  the  interior,  or  to  minor  coast  ports  or  the  re- 
export is  left  to  wholesalers.  Even  where  European  concerns 
in  the  importing  center  have  branches  in  minor  points  in  their 
territory,  they  use  these  mostly  for  the  purchase  and  the  for- 
warding of  native  products  rather  than  as  selling  branches  for 
imported  goods.  This  is  because  European  and  American  im- 
porters in  these  import  centers  prefer  for  reasons  of  increased 
security  to  sell  only  to  native  wholesalers,  and  because  in  the 
distribution  from  the  importing  center  inland  they  could  not 
compete  with  native  wholesalers.  The  native  wholesaler  can 
effect  the  distribution  more  cheaply,  as  for  instance  by  means  of 
junk  boats  in  China,  native  carriers,  etc.  This  relieves  the  im- 
porter from  the  risk  of  being  exposed  to  chicanery  on  the  part 
of  native  authorities,  special  taxes,  etc.  Native  wholesalers  can 
effect  business  with  their  own  fellow-countrymen  more  ration- 
ally, they  run  less  risk  in  granting  credits  to  natives,  their  ex- 
penses are  smaller,  their  standard  of  living  more  modest,  and 
they  are  content  with  smaller  earnings.  This  is  particularly  true 
in  markets  where  the  distribution  still  uses  the  caravan  as  a 
medium.  In  re-export  these  native  wholesalers  prefer  to  enter 
into  relations  with  their  own  nationals  located  abroad,  as  for  in- 
stance the  wholesalers  in  Bombay  as  re-exporters  are  in  business 
relations  with  Indian  firms  in  Zanzibar  and  on  the  Persian  Gulf, 
the  Chinese  wholesalers  in  Singapore  in  relations  with  Chinese 
merchants  in  Indo-China. 

In  the  Orient — both  the  Near  and  the  Far  East — the  native 
business  community  is  centered  in  the  bazaar.  This  is  generally 
a  special  part  of  the  city,  consisting  of  a  complex  of  streets 
with  business  establishments  wholesale  and  retail.  Here  the  na- 
tive traders  sell  both  home  and  imported  goods. 

For  mediation  of  business  with  bazaar  merchants,  as  well 
as  with  the  general  run  of  native  traders  who  have  not  attained 
to  European  culture,  the  European  and  the  American  merchants, 
particularly  the  general  importers,  use  often  the  service  of  na- 


IMPORTING   ANALYZED  U3 

tive  brokers.  This  is  done  largely  because  of  the  difficulty  of 
understanding  the  language  of  the  native  merchant.  The  native 
brokers  speak  either  a  European  language  or  at  least  a  dialect 
understandable  to  the  foreigner,  such  as  pidgin-English  in  China. 
And  in  many  markets  it  is  considered  below  the  social  standing 
of  a  European  or  American  importer  to  solicit  business  direct 
from  native  traders. 

In  territories  where  a  native  wholesale  merchant  class  is 
lacking  foreign  importers  must  establish  either  branches  or  spe- 
cial settlements  which  are  not  in  current  independent  connec- 
tions with  houses  in  Europe  or  America.  These  undertake  the 
inland  distribution  of  imported  goods.  Such  conditions  prevail 
in  South  Sea  Islands  and  in  Central  Africa.  In  territories  where 
the  entire  wholesale  merchant  community  has  some  form  of 
European  culture,  as  in  South  and  Central  America,  South 
Africa,  Australia,  general  importers  sell  also  to  wholesalers 
throughout  the  country,  excepting  to  the  extent  that  the  large 
wholesalers  may  be  domiciled  in  the  importing  center  and  do- 
minate the  inland  distribution  trade,  so  that  the  importers  dare 
not  compete  with  them,  fearing  to  lose  their  custom. 

Wherever  the  ordinary  native  wholesalers  do  not  maintain 
direct  connections  with  Europe  and  America  either  in  the  im- 
port or  in  the  export,  it  is  the  custom  for  the  merchants  mediat- 
ing in  international  commerce  to  unite  import  and  export  trade 
in  one  enterprise.  This  is  largely  done  in  Asia  and  Africa,  with 
the  exception  of  South  Africa,  certain  parts  of  North  Africa 
and  the  Asiatic  Levant,  also  in  the  South  Sea  Islands,  in  the 
small  import  and  export  trading  communities  of  Soudi  and 
Central  America  and  of  the  West  Indies.  Among  general  im- 
porters here  only  those  of  weak  financial  standing  limit  them- 
selves to  the  import  trade  exclusively,  because  the  capitalization 
required  for  the  carrying  on  of  export  trade  is  considerable, 
particularly  as  the  turnover  in  produce  is  generally  much  larger 
than  in  the  manufactured  goods  imported  into  these  markets. 
The  combination  of  import  and  export  is  to  some  extent  due 
to  the  desire  to  utilize  to  the  utmost  the  expensive  oversea  busi- 
ness establishments.  European  employees  in  these  establish- 
ments receive  much  higher  salaries  than  at  home,  for  which 
reason  European  and  American  staffs  are  not  large  and  are  sup- 


114  INTERNATIONAL  COMMERCE 

plemented  as  far  as  possible  by  native  assistants ;  the  principals 
in  these  foreign  places  are  called  upon  to  live  in  an  expensive 
fashion  in  order  to  maintain  their  standing;  the  cost  of  estab- 
lishing, controlling  and  communicating  with  such  oversea  estab- 
lishments is  high. 

Again  the  manner  of  doing  business  with  consumers,  which 
is  based  in  many  places  on  an  exchange  of  commdities,  sug- 
gests this  combination  of  import  and  export.  For  this  reason 
foreign  houses  in  many  markets  maintain  settlements  in  charge 
of  so-called  "factors,"  both  for  trading  and  for  producing  pur- 
poses, often  representing  a  system  of  barns,  warehouses,  sales 
rooms,  etc.,  with  a  semi-military  organization  of  employees. 
Such  factors  generally  are  vested  with  very  thorough-going 
powers. 

5.  Advantages  and  Disadvantages  of  Dealing  with  Oversea  Im- 
porters in  the  Strictest  Sense  of  the  Term,  from  the 
Point  of  View  of  Exporters  and  of  Exporting  Manufac- 
turers. 

The  advantages  of  dealing  with  general  importers  may  be 
considered  from  the  following  points  of  view:  in  dealing  with 
general  importers  the  exporter  has  to  do  with  merchants  of 
European  culture  and  business  training.  The  same  code  of 
commercial  morality  prevails  among  them  as  in  the  European 
and  American  business  communities.  Their  capitalization  on 
the  whole  surpasses  that  of  the  ordinary  local  wholesaler.  As  a 
class  they  are  not  numerous  in  proportion  to  their  commercial 
importance  and  it  is  easy  to  secure  reliable  credit  information 
regarding  them.  Business  dealings  with  general  importers  are 
characterized  by  a  higher  average  or  security.  They  do  not  over- 
strain the  confidence  of  the  exporter  as  much  as  the  ordinary 
native  wholesalers.  They  demand  less  credit  and  shorter  terms. 
Frequently  they  pay  cash  with  their  purchases,  opening  credits  for 
their  requirements  either  with  a  European  or  an  American  bank 
or  with  their  parent  house  or  buying  branch  in  Europe  or  Amer- 
ica. In  the  hands  of  the  general  importer  there  accumulates  a 
concentration  of  the  demand  for  a  certain  territory  which  sim- 
plifies the  selling  task  of  the  exporter.     It  is  possible  to  limit 


DEALING  WITH   IMPORTERS  LIS 

dealings  with  general  importers  to  correspondence,  supplemented 
by  cabling  and  only  very  occasional  visits  of  traveling  salesmen. 
Dealing  with  general  importers  saves  the  expense  of  establish- 
ing branches  or  even  of  appointing  agents.  Only  in  certain  im- 
port centers,  where  the  line  of  demarcation  between  general  im- 
porters and  the  ordinary  domestic  wholesale  trade  is  not  sharp, 
as  for  instance  in  Buenos  Ayres,  and  where  foreign  exporters 
sell  to  both  classes,  is  it  customary  to  employ  agents  even  in  in- 
tercourse with  general  importers. 

The  advantage  of  the  simplified  commercial  organization 
when  dealing  with  a  general  importer  is  counterbalanced  to 
some  extent  by  the  disadvantage  of  the  higher  price  of  goods 
when  reaching  the  trade  and  the  consumer  due  to  the  earnings 
of  the  general  importer.  This  may  reach  the  stage  of  hindering 
the  development  of  export  in  a  given  article,  or  at  least  of  cur- 
tailing the  exporter's  earnings.  Increased  competition  may  there- 
fore sometimes  force  the  exporter  to  go  around  the  importer  in 
the  foreign  market  and  to  sell  direct  to  the  wholesale  trade. 
But  even  apart  from  the  point  of  view  of  the  selling  price,  deal- 
ing with  general  importers  export  cannot  attain  that  degree  of 
development  which  is  possible  in  selling  to  wholesalers,  retailers 
and  public  institutions  and  producers  through  branches,  agents 
and  traveling  salesmen.  Selling  direct  is  more  expensive,  but 
also  more  effective.  In  dealing  direct  the  exporter  comes  to 
learn  the  tastes,  the  demand,  the  peculiarities  in  each  market. 
The  commercial  organs  directly  subservient  to  him  are  busy  in 
his  own  interest  exclusively.  The  exporter  cannot  impose  upon 
an  independent  importer,  even  where  he  has  granted  him  his 
representation,  any  selling  policy  of  his  own.  If  he  changes  his 
actual  representative  or  agent,  the  exporter  still  retains  his  circle 
of  customers,  but  in  changing  his  connections  with  one  import- 
ing house  for  that  with  another,  even  if  the  first  is  entrusted 
with  a  so-called  representation  or  agency,  the  exporter  loses  his 
circle  of  customers,  particularly  where  goods  are  shipped  in 
neutral  make-up.  Through  relations  with  several  general  im- 
porters in  the  same  place  it  is  rarely  possible  to  build  up  an  ex- 
tensive business,  for  particularly  in  smaller  places  it  is  impos- 
sible to  sell  the  same  goods  to  more  than  one  importer.  The 
local  wholesalers  would  be  only  too  eager  to  exploit  the  competi- 


116  INTERNATIONAL  COMMERCE 

tion  between  them.  This  would  lead  to  lower  prices  and  the 
importers  would  lose  interest  in  handling  the  article.  In  com- 
bining sales  to  general  importers  with  sales  through  traveling 
salesmen  or  agents  to  wholesalers,  jobbers  and  retailers,  the 
exporter  loses  the  benefit  of  the  concentration  of  the  demand 
in  the  hands  of  the  importer.  Such  a  combination  is  very  dif- 
ficult even  in  the  case  of  price  concessions  to  the  importers  and 
the  reservation  of  certain  lines  for  them,  for  importers  as  a  rule 
do  not  tolerate  the  simultaneous  commercial  intercourse  of  the 
exporter  with  them  and  with  their  customers.  This  is  of  smaller 
importance  in  those  places  where  the  position  of  trie  general  im- 
porter has  become  weakened  and  they  approach  more  or  less 
the  character  of  ordinary  wholesalers,  as  is  the  case  in  many 
South  American  points.  Particularly  dangerous  is  the  practice 
of  turning  over  a  representation  or  submitting  samples  to  gen- 
eral importers  who  are  subjects  or  citizens  of  a  nation  different 
from  that  of  the  exporter,  for  they  are  apt  to  show  the  samples 
to  exporters  of  their  own  nation  to  the  detriment  of  the  foreign 
exporter.  This  is  a  point  which  American  exporters  must  con- 
sider, because  they  have  comparatively  few  general  importers 
abroad  of  American  nationality  thorugh  whom  they  can  do  busi- 
ness. Concentrating  their  dealings  with  one  general  importer 
the  exporter  runs  the  risk  of  considerable  loss  through  one  in- 
dividual business  failure,  whereas  occasional  unavoidable  small 
losses  through  failures  of  individual  smaller  customers  may  be 
counterbalanced  by  a  little  extra  charge  by  way  of  self -insur- 
ance. 


6.    The  Growth  and  Development  of  Import  Trading 
Centers  Overseas. 

An  import  center  is  a  place  where  foreign  goods  are  bought 
in  large  quantities  for  consumption,  distribution  or  further  ship- 
ment. Therefore  all  prominent  sea  ports  where  goods  are  im- 
ported are  import  centers ;  points  of  particularly  large  consump- 
tion of  imported  goods,  and  to  a  lesser  extent  transshipment 
points  are  also  import  centers.  Import  trading  centers  are  such 
places  where  imported  goods  are  largely  traded  in,  whether  for 
inland  use  or  for  neighboring  countries,  whether  shipped  direct 


OVERSEA  IMPORT  CENTERS  117 

from  abroad  or  in  re-export. 

The  international  importance  of  an  import  trading  center 
depends  in  the  first  instance  upon  the  quantity  of  imports  traded 
there  and  secondly  upon  the  range  of  sources  of  supply  and  sell- 
ing territories  with  which  the  import  trading  center  is  doinj  an 
extensive  business.  The  quantity  of  imported  goods  traded  in 
an  import  trading  center  depends  upon  the  existing  demand  and 
the  capacity  of  absorption  of  imports  in  the  territory  served  by 
it  and  upon  the  degree  in  which  it  must  share  with  its  compet- 
ing import  trading  centers  the  task  of  supplying  that  territory 
with  imports. 

As  a  rule  there  is  a  full  freedom  of  international  competition 
in  these  import  trading  centers.  But  occasionally  we  find  places 
in  which  one  country's  imports  predominate.  It  may  be  that 
the  import  trading  center  is  in  a  territory  which  maintains  either 
freedom  from  import  duties  or  preferential  duties  for  the  pro- 
ducts of  one  exporting  country  side  by  side  with  high  protective 
duties  against  imports  from  others,  as  in  the  case  of  some  French 
colonies;  or  the  importers  in  a  given  place  may  all  be  tied  up 
with  or  financially  dependent  on  connections  with  one  particular 
exporting  country,  as  for  instance  in  Dutch  East  Indies  with 
regard  to  Netherlands,  where  until  recently  even  goods  of  other 
than  Dutch  origin  were  bought  through  Dutch  importers  via 
Holland.  The  sales  effected  from  an  import  trading  center  (re- 
ferring to  European  and  American  manufactured  goods  im- 
ported there)  are  rarely  international.  This  international  sell- 
ing of  imported  goods,  that  is  intermediate  trade  with  other  for- 
eign countries,  is  of  importance  in  Bombay,  Singapore  and 
Hongkong. 

In  European  countries  dealing  one  with  another,  due  to 
more  or  less  direct  dealings  between  wholesalers  and  retailers 
importing  their  supplies  and  exporters  abroad  every  commercial 
center  is  at  the  same  time  an  import  trading  center,  and  there 
is  observable  therefore — particularly  in  Germany — the  phenom- 
enon of  the  decentralization  of  import  trade. 

It  is  principally  a  seaport,  and  secondarily  an  inland  navi- 
gation port,  where  imports  can  be  delivered  by  marine  vessels 
or  by  river  navigation  in  connection  with  marine  navigation,  that 


118  INTERNATIONAL  COMMERCE 

is  likely  to  develop  into  an  important  trading  center  of  import 
commerce,  the  examples  of  the  latter  being  Bagdad,  Asuncion, 
Montreal.  Or  it  may  be  a  large  city  in  close  proximity  to  a 
seaport,  such  as  Lima-Callao,  Caracas-La  Guaira,  Osaka-Kobe, 
finally  important  centers  of  consumption  inland,  Cairo  next  to 
Alexandria,  Delhi  besides  Bombay  and  Calcutta,  Johannesburg 
besides  the  seaport  cities  of  South  Africa. 

While  the  growth  of  import  trading  centers  is  a  phenomenon 
of  centralization  of  imports  in  certain  strongholds,  cultural  and 
commercial  development  inevitably  brings  about  a  certain  de- 
centralization. Thus  the  development  of  a  modern  system  of 
railways,  the  tendency  of  vessels  to  touch  minor  ports  of  entry, 
the  effort  of  foreign  exporters  by  sending  traveling  salesmen 
and  agents  to  call  on  the  trade  in  minor  points,  the  competition 
among  traders  in  smaller  commercial  cities  forcing  them  to  im- 
port direct,  the  rise  of  the  cultural  and  commercial  levels — all 
lead  inevitably  to  the  participation  of  additional  towns  in  the 
general  importation  of  foreign  goods. 

The  exporter  whose  activity  adds  to  this  decentralization 
must  figure  upon  the  loss  of  his  trade  with  general  importers 
located  in  the  prominent  centers  of  import  commerce,  receiving 
in  their  place  a  wider  circle  of  customers,  who  are  generally 
weaker  financially,  requiring  more  credit,  frequently  of  inferior 
commercial  training,  and  from  whom  he  can  for  a  time  secure 
higher  prices  until  the  competition  neutralizes  this  advantage, 
but  to  deal  with  them  requires  a  more  expensive  organization, 
greater  difficulties — for  instance,  the  need  of  competent  agents, 
who  are  not  so  easy  to  secure — so  that  an  exporter  will  not 
frivolously  attempt  to  decentralize  his  trade  with  an  import  mar- 
ket. But  if  a  decentralization  tendency  in  a  given  market  is  ob- 
servable, it  may  be  a  wise  policy  to  be  among  the  first  to  organ- 
ize accordingly. 

In  many  minor  points  in  the  Orient  and  elsewhere  the  same 
goods  are  imported  direct  from  the  exporting  countries  and 
bought  by  wholesalers  from  the  general  importers  in  the  im- 
port trading  centers.  The  ability  of  the  latter  to  do  business  in 
spite  of  direct  ftnporting  by  wholesalers  in  smaller  inland  towns 
is  due  to  the  fact  that  their  customers  receive  from  them  credit 
favors  which  make  them  dependent  upon  the  importers,  where- 


OVERSEA  IMPORT  CENTERS  119 

as  the  exporter  cannot  or  will  not  finance  the  wholesaler  abroad 
to  the  same  extent.  Then  the  general  importers  obtain  their 
goods  so  much  cheaper  than  the  ordinary  wholesalers  in  these 
smaller  towns.  General  importers  and  large  distributing  whole- 
salers located  in  the  importing  ports  can  because  of  the  larger 
volume  of  their  transactions  always  underbuy  and  dierefore 
undersell  the  wholesalers  in  the  inland  trading  points. 


CHAPTER  VII. 

II.   The  Organization  of  the  Import  Trade  in  Products  of 
Oversea  Origin. 

a.     the  organization  in  the  exporting  country. 

i.     General  Remarks. 

In  foregoing  chapters  we  considered  the  organization  of  the 
commerce  in  manufactured  products  shipped  from  the  indus- 
trial countries,  such  as  the  United  States,  Great  Britain  and  cer- 
tain countries  of  Continental  Europe  to  countries  which  to  a 
large  extent  obtain  manufactured  goods  from  abroad,  or  coun- 
tries which  we  broadly  call  the  export  field. 

We  pursued  our  consideration  of  this  organization  begin- 
ning with  a  review  of  the  organization  in  the  exporting  coun- 
try; we  proceeded  to  a  consideration  of  the  connections  between 
the  exporting  country  and  the  importing  country,  and  finally  ex- 
amined the  counterpart  organization  in  the  importing  country. 

We  may  now  turn  our  attention  to  the  consideration  of  the 
import  trade  in  the  industrial  countries,  and  in  this  connection 
we  may  ignore  the  import  into  one  industrial  country  from  an- 
other, such  as  imports  into  United  States  from  European 
manufacturing  countries,  or  imports  into  one  European  manu- 
facturing country  from  another,  in  other  words  imports  of  manu- 
factured products  or  the  interchange  of  manufactured  products 
between  two  industrial  countries.  Large  as  this  trade  is,  its  cha- 
racteristics have  been  discussed  in  and  are  covered  by  our  con- 
sideration of  the  export  trade  from  manufacturing  countries. 
Agencies,  manufacturers'  own  branches,  wholesalers'  branches, 
sales  representatives,  traveling  salesmen, — correspondence  also, 
because  of  the  usually  good  postal  service  between  industrially 
developed  countries  of  Europe  and  between  Europe  and  United 
States  on  the  one  hand,  buying  trips  and  buying  agencies  on  the 
other  cover  the  organization  of  the  import  of  manufactured  pro- 
ducts by  one  manufacturing  country  from  another.     This  busi- 


OVERSEA  PRODUCERS  12] 

ness,  moreover,  is  limited  by  tariff  walls  (excepting  in  imports 
into  Great  Britain  before  the  war)  to  specialties  which  are  cither 
through  patent  protection,  or  more  efficient  production  capable 
of  competing  against  the  home  product. 

In  examining  the  organization  of  the  import  trade  we  will 
rather  take  up  for  consideration  the  import  into  the  industrially 
developed  countries  referred  to  of  natural  raw  products  gained 
in  oversea  countries.  And  here  again  we  may  follow  the  same 
line  of  examination  as  pursued  in  reviewing  the  organization  of 
the  export  trade :  we  will  commence  with  the  organization  in 
the  exporting  country,  then  proceed  to  a  review  of  the  connec- 
tions between  the  exporting  and  the  importing  country  and  the 
organization  in  the  importing  country,  bearing  in  mind  that  the 
goods  are  chiefly  natural  products,  the  sellers  are  located  over- 
seas and  the  buyers  in  United  States  and  Europe. 

2.     The  Participation  of  Oversea  Producers  in  the  Export 
of  Oversea  Products  to  Industrial  Countries. 

In  exporting  from  oversea  countries  the  producer  plays  a 
far  less  prominent  role  than  the  European  or  American  pro- 
ducer in  exports  from  Europe  or  America.  The  reason  is  that 
in  these  countries  the  manufacturing  industry  has  not  reached 
a  high  degree  of  development,  and  even  where  manufacturing 
enterprises  are  fairly  well  advanced,  they  have  not  yet  attained 
the  position  of  being  able  to  do  more  than  cater  to  the  home 
market,  in  other  words  they  are  not  capable  of  doing  an  export 
business  or  competing  in  international  transactions.  In  many 
instances  producers  in  these  countries  are  unsuited  for  direct 
dealings  with  foreign  countries. 

As  examples  we  find  the  sugar  industry  in  Egypt :  the  pro- 
ducers here  avail  themselves  of  the  service  of  exporters  in 
order  to  place  their  production  in  the  European  and  American 
markets ;  Chinese  silk  growers,  because  of  the  inability  of  na- 
tives to  do  a  direct  business,  are  dependent  upon  the  services 
of  European  and  American  exporters  to  ship  their  gojds  to 
Europe  and  the  United  States;  though  silk  filatures  in  China 
which  are  owned  by  foreigners  do  a  direct  business,  but  they  are 
generally  owned  by  export  merchants,  so  that  this  can  be  hardly 


122  INTERNATIONAL  COMMERCE 

quoted  as  an  example  of  producers  oversea  doing  a  direct  ex- 
port business ;   the  Japanese  manufacturers  are  capable  of  doing 
a  direct  business  in  their  cheap  wares,  but  there  exists  a  strong 
prejudice   on   the  part   of   American   and   European   importers 
against  doing  a  long  range  direct  business  with  Japanese  pro- 
ducers.    The  great  meat  packing  industries  of  the  River  Plate 
countries,  on  the  other  hand,  in  exporting  direct  to  Europe  fur- 
nish us  with  an  example  of  direct  export  by  oversea  producers. 
Among  producers  overseas  shipping  their  products  direct  to 
industrial  countries  we  have  in  the  first  instance  the  great  mining 
enterprises.    They  produce  materials  largely  used  in  Europe  and 
in  the  United  States.     To  a  large  extent  these  enterprises  are 
owned  and  managed  by  Europeans  and  Americans.     They  are 
very  frequently  enterprises  of  great  magnitude,  fully  capable  of 
maintaining  their  own  selling  organization  abroad.     They  either 
sell  through  their  parent  establishment  which  is  apt  to  be  located 
in  Europe  or  in  United  States,  or  through  agents.    Or  they  make 
contracts  with  prominent  importers  in  those  countries,  or  with 
their  buying  agents  in  the  country  of  production.     The  volume 
of  individual  transactions  is  usually  large.     Sometimes  the  out- 
put for  a  specified  period  is  contracted  for;   usually  entire  ship- 
loads are  sold.    The  smaller  enterprises  of  the  same  character, 
however,  are  dependent  upon  the  services  of  export  houses  in 
the  country  of  production.     Thus  the  large  producers  of  salt- 
peter in  Chile  sell  direct  to  foreign  countries,  the  smaller  pro- 
ducers to  exporters.     The  mining  enterprises  of  Tasmania  sell 
their  production  on  a  large  scale,  receiving  bids  for  the  entire 
output   of    individual   mines    from   buying   agents    representing 
European  buyers. 

Agricultural  enterprises  located  overseas  including  the  great 
tobacco,  fruit  and  other  plantations,  do  relatively  a  larger 
direct  export  business  than  agricultural  producers  in  America 
and  Europe.  These  plantation  enterprises  may  be  owned  in 
Europe  or  in  United  States  and  sell  their  products  direct  through 
their  parent  house,  or  they  may  enter  into  relations  with  im- 
porters or  with  banks  from  which  they  receive  advances  and  to 
which  they  turn  over  their  production  on  consignment.  Many 
of  these  producers  in  addition  to  producing  act  also  as  mer- 
chants, inasmuch  as  they  bu\  up  the  production  of  small  native 


OVERSEA  EXPORTERS  183 

producers,  or  take  it  up  by  way  of  barter,  for  which  rea- 
son they  also  import  foreign  goods.  This  is  done  to  a  large 
extent  in  the  South  Sea  Islands  and  in  Central  Africa,  where 
purely  a  plantation  business  without  the  commercial  side  lines 
would  not  be  very  profitable.  Purely  plantation  enterprises  do- 
ing a  direct  export  business  are  the  tea  and  indigo  plantation- 
in  India,  tobacco,  coffee  and  tea  plantations  in  Dutch  East  Indies, 
sugar  and  tobacco  plantations  in  the  West  Indies,  tobacco,  cocoa, 
sugar,  coffee  plantations  in  Central  America  and  in  the  north- 
ern part  of  South  America. 

Among  producers  doing  a  direct  export  business  we  may 
also  count  some  colonial  administrations  which  either  operate 
plantations  officially  or  impose  upon  the  natives  the  production 
of  certain  quantities  of  specified  products,  or  collect  their  taxes 
in  the  shape  of  natural  products.  They  sell  these  products 
either  to  colonial  exporters,  or  direct  abroad  through  specially 
appointed  sales  commissioners,  as  the  Dutch  and  the  Congo  gov- 
ernments, and,  before  the  war,  also  in  some  instances  the  Ger- 
man Colonial  Office. 

3.     Oversea  Exporters  Shipping  to  Europe  and  to 
United  States. 

In  our  consideration  of  the  organization  of  the  export  trade 
we  established  the  following  distinctions  between  the  various 
types  of  exporters:  we  found  that  the  term  exporter  in  its 
broadest  aspect  includes  all  persons  who  export,  but  that  in  its 
stricter  application  it  refers  to  two  groups  of  exporters.  The 
first  consists  of  wholesale  merchants  principally  engaged  in  the 
domestic  trade,  trading  regularly  in  certain  specified  classes  of 
merchandise,  maintaining  stocks  of  goods  which  they  sell  both 
inland,  and  if  opportunity  offers,  abroad,  and  entering  preferably 
into  business  connections  with  such  foreign  countries  trading  with 
which  offers  no  unusual  difficulties,  that  is  doing  an  incidental 
export  business;  the  second  group — and  these  are  exporters  in 
the  strictest  sense  of  the  term — is  formed  by  merchants  in  whose 
business  the  idea  of  export  predominates;  these  general!}-  keep 
no  stocks;  they  exclude  no  class  of  goods  in  principle  from  their 
operations;    they  take  up  dealings  with  markets  with  which  an 


124  INTERNATIONAL  COMMERCE 

ordinary  wholesaler  would  find  it  too  difficult  to  do  an  export 
business.  These  exporters  are  specialists  in  doing  an  export 
business,  and  are  frequently  termed  "general  exporters"  because 
of  the  universal  range  of  products  which  they  export. 

In  exporting  from  overseas  the  distinction  between  these 
two  groups  is  not  always  clearly  demarcated.  The  characteristic 
noted  previously  in  differentiating  beween  them,  namely  that  the 
former  first  purchase  the  goods  which  they  handle  and  sell 
them  afterwards,  from  stock,  and  that  the  latter  sell  goods  first 
and  arrange  for  their  purchase  afterwards,  does  not  apply  over- 
seas to  the  same  extent  as  it  does  in  Europe  and  in  America. 
Overseas,  too,  there  is  a  tendency  among  exporters  in  the 
strictest  sense,  that  is  among  merchants  doing  exclusively  an  ex- 
port business,  to  specialize  in  one  line,  as  for  instance  in  the  ex- 
port of  tea. 

Overseas  a  special  characteristic  applies  to  exporters  in  the 
strictest  sense  which  is  absent  in  the  case  of  general  exporters 
in  Europe  and  in  United  States :  they  generally  intervene  as 
middlemen  between  the  regular  wholesalers  and  jobbers  of  the 
exporting  country  and  the  buyers  abroad,  although  there  are 
also  some  regular  wholesalers  who  do  their  own  exporting  and 
exporters  in  the  strictest  sense  who  buy  up  small  lots  of  products 
from  smaller  producers,  in  order  to  export  them  in  larger  lots. 

Even  if  an  exporter  in  oversea  countries  does  not  generalize 
in  his  exports,  but  specializes  in  one  product,  and  the  regular 
wholesalers  and  jobbers — if  there  be  such  in  the  territory  con- 
cerned— participate  to  some  extent  in  exporting,  he  still  must  be 
considered  as  an  exporter  in  the  strict  sense  of  the  term,  that  is 
an  exclusively  exporting  merchant,  if  the  volume  of  his  business 
exceeds  the  usual  scope  of  the  regular  wholesaler,  and  if  his 
business  clearly  shows  its  aim  to  attend  exclusively  to  the  export 
of  home  products  to  oversea  markets. 

The  dominating  role  of  these  exporters  in  the  strictest  sense 
of  the  word,  that  is  of  merchants  specializing  in  export,  in  the 
export  of  products  from  oversea  producing  countries  to  the 
industrial  countries  of  Europe  and  America,  is  due  to  many  rea- 
sons. The  business  of  selling  oversea  products  in  Europe  and 
America  requires  the  mastery  of  a  complicated  commercial  tech- 
nique, a  large  capitalization,  or  at  least  a  thorough-going  finan- 


OVERSEA  EXPORTERS  125 

cing  assistance  of  banks  and  of  importers,  for  which  reason  re 
gular  wholesalers  and  jobbers,  whose  principal  business  is  to 
buy  up  lots  of  products  from  producers  and  small  traders  in- 
land, cannot  as  a  rule  engage  in  direct  dealings  with  Europe  and 
America.  They  must  leave  this  to  firms  whose  specialty  it  is  to 
negotiate  business  with  foreign  markets ;  particularly  is  this  true 
of  oversea  producing  countries  where  the  wholesalers  and  job- 
bers do  not  possess  the  commercial  training  equivalent  to  that 
of  European  and  American  businessmen. ' 

Exporters  in  the  strictest  sense  of  the  word  located  in  over- 
sea producing  territories  are  generally  Europeans  or  Americans. 
Americans  are  assuming  an  increasingly  important  part  as  export- 
ers from  the  Far  East  and  from  Central  and  South  America.  The 
native  merchants  of  Central  and  South  America,  though  they  par- 
ticipate to  a  marked  degree  in  the  import  of  manufactured  goods 
into  their  countries,  still  occupy  a  weak  position  in  the  matter 
of  exports  of  their  national  products  to  Europe  and  America. 
To  a  lesser  degree  than  Europeans  and  Americans  we  find 
Asiatic  firms  exporting  direct  to  Europe  and  America.  Native 
firms  from  the  East  Indies  find  occasionally  credit  in  London 
and  send  consignments  direct  to  London.  Japanese  firms  main- 
tain sales  offices  in  Europe  and  America,  particularly  in  raw 
silk. 

The  reasons  for  the  predominance  of  Europeans  and  Amer- 
icans in  the  export  trade  from  overseas  to  Europe  and  America 
are  parallel  to  those  accounting  for  the  prevalence  of  exporters 
in  the  strictest  sense  of  the  term,  that  is  of  merchants  special- 
izing in  the  export  trade.  Particularly  dominating  is  the  posi- 
tion of  European  firms  specializing  in  export  in  the  shipment 
from  oversea  producing  territories  to  Europe  and  America  of 
those  commodities  in  the  world  trade  which  are  specially  sub- 
ject to  international  speculation.  It  is  clear  that  such  commodi- 
ties can  be  handled  only  by  firms  thoroughly  conversant  with 
the  commercial  technique  of  the  world's  markets  and  maintain- 
ing the  most  intimate  relations  with  them. 

But  the  wholesalers  and  jobbers  in  these  territories  who  do 
an  incidental  export  business,  particularly  in  trading  between 
countries  where  a  considerable  cultural  difference  exists  between 


i26  rXTERNATIONAL  COMMERCE 

the  native  and  the  foreign  commercial  factors,  are  very  largely 
native  firms.  In  this  case  the  native  wholesaler  doing  an  export 
business  as  a  side  line  preferably  enters  into  business  relations 
with  a  fellow  countryman  abroad. 

We  already  indicated  that  oversea  firms  doing  business  with 
Europe  and  America  combine  to  a  large  extent  the  import  with 
the  export  business.  Being  thus  general  importers  and  export- 
ers, such  firms  do  not  as  a  rule  exclude  any  line  of  saleable  pro- 
ducts from  their  operations.  Only  some  articles  which  require 
too  much  attention  to  details,  as  for  instance  curios,  are  elimin- 
ated by  many  large  firms,  while  smaller  firms  abstain  from  hand- 
ling lines  which  require  too  large  a  capitalization  for  their 
proper  handling,  or  are  too  risky,  or  presuppose  a  special  tech- 
nical knowledge  and  equipment.  Such  lines  are  then  handled 
by  specialists,  as  for  instance  specialists  in  tea  or  silk  in  the 
Far  East. 

Import  and  export,  however,  are  apt  to  be  separated,  either 
altogether  or  partially,  when  the  export  trade  of  the  particular 
oversea  territory  has  attained  a  degree  of  development  permit- 
ting a  large  business  even  when  specializing  in  either  the  import 
or  the  export,  and  also  permitting  domestic  wholesalers  to  par- 
ticipate to  a  greater  extent  either  in  import  or  in  export.  The 
increased  participation  of  domestic  wholesalers  located  overseas 
in  the  import  and  export  trade  leads  in  some  instances  concerns 
which  had  formerly  done  a  general  import  and  export  business, 
to  drop  importation  and  to  devote  themselves  exclusively  to  ex- 
portation, since  in  this  class  of  business  ordinary  wholesalers 
cannot  efficiently  compete  with  them.  And  eventually  these 
houses  may  even  specialize  in  the  export  of  a  few  selected 
commodities,  not  necessarily  of  the  same  character,  but  promis- 
ing large  and  profitable  transactions. 

Oversea  exporters  carry  on  their  business  as  merchants  for 
own  account,  and  in  the  majority  of  cases  buy  commodities  first 
and  sell  them  afterwards.  They  may  ship  the  goods  after  effect- 
ing the  sale,  or  they  may  sell  them  while  the  merchandise  is 
floating  on  the  sea,  or  they  may  sell  it  after  arrival  in  Europe 
or  America.  In  the  case  of  commodities  subject  to  violent  price 
fluctuations  in  the  world's  markets,  the  international  speculation 


OVERSEA  EXPORTERS  127 

being  able  to  affect  prices  in  a  marked  degree,  a  considerable 
risk  attaches  to  business  of  this  class.  The  exporter  is  thus 
drawn  into  speculation;  he  may  buy  for  future  delivery,  or  he 
may  contract  in  advance  for  the  yield  of  an  entire  crop,  he  may 
accumulate  large  quantities  of  the  commodity  concerned  and 
wait  for  a  favorable  market  situation  before  selling.  He  may 
seek  to  protect  himself  by  making  firm  or  unbinding  offers  to 
buyers  in  Europe  and  America  and  receiving  orders  on  the  basis 
of  which  he  places  his  own  purchases.  This  is  not  a  very  fre- 
quent proceeding  because  of  the  difficulties  of  concluding  busi- 
ness in  speculative  commodities  by  correspondence  and  against 
the  submission  of  samples  between  oversea  exporters  and  buy- 
ers in  Europe  and  America,  and  because  of  the  time  lost  in  the 
exporter's  securing  delivery  promises  and  quotations  from  third 
parties. 

Oversea  products  are  subject  to  considerable  price  fluctua- 
tions. Unlike  manufactured  goods  exported  from  abroad,  which 
can  be  produced  whenever  desired,  we  deal  here  with  concrete 
existing  quantities  of  commodities,  and  third  parties  may  not 
be  induced  to  keep  their  products  in  stock  while  the  exporter  is 
coming  to  an  understanding  with  the  buyer  abroad,  but  may  be 
tempted  to  sell  at  the  first  opportunity. 

While  principally  acting  as  merchants  for  own  account, 
oversea  exporters  act  also  as  buying  commissioners.  The  order 
to  buy  may  be  received  by  the  exporter  on  the  basis  of  the  buyer 
accepting  his  firm  or  unbinding  offer,  or  on  the  basis  of  a  time 
and  price  limit  set  by  the  principal,  or  the  principal  may  leave 
the  price,  etc.,  to  the  judgment  and  integrity  of  the  exporter. 
Where  the  oversea  exporter  makes  an  offer  of  a  specified  quan- 
tity of  a  commodity  at  a  specified  price,  he  charges  a  buying 
commission  and  expenses,  although  he  may  have  made  his  offer 
on  the  basis  of  a  stock  bought  by  him  on  speculation.  Since 
this  is  usually  done  in  articles  in  which  a  general  market  price 
rules,  as  for  instance  in  wool  bought  in  the  River  Plate  districts, 
there  is  nothing  improper  or  illegal  in  this  practice.  Though 
buying  on  commission,  the  exporter  in  such  instances  also  as- 
sumes the  guarantee  of  quality,  and  in  the  case  the  goods  do 
not  come  up  to  quality,  he  must  pay  the  price  difference  on  the 


1^8  INTERNATIONAL  COMMERCE 

basis  of  arbitration,  without  having  a  recourse  to  his  own  source 
of  supply;  he  really  has  the  same  responsibility  as  when  acting 
for  his  own  account,  and  the  commission  relationship  is  merely 
a  matter  of  form. 

Under  such  circumstances  the  exporters  overseas  generally 
prefer  to  act  for  their  own  account  solely,  because  this  leaves 
ihem  more  scope  for  the  increase  of  their  earnings  and  safe- 
guards their  rights  under  the  law  to  a  greater  degree.  Another 
point  which  makes  a  commission  relationship  undesirable,  is 
the  difficulty  of  controlling  the  quotations  of  the  export  commis- 
sion merchant,  since  he  has  to  buy  often  in  a  number  of  smaller 
and  out-of-the-way  producing  bases,  the  market  prices  prevailing 
in  which  seldom  reach  Europe  or  America,  and  again  in  many 
commodities  standards  of  quality  are  lacking  and  a  definite  mar- 
ket price  is  therefore  impossible  to  obtain.  The  greater  the  dis- 
tance between  the  shipper  and  the  buyer,  the  greater  the  difficul- 
ties in  the  way  of  establishing  a  commission  relationship.  Like- 
wise where  the  range  of  variations  in  standards  of  quality  and 
in  possible  quotations  is  very  great,  these  difficulties  are  increased. 
Buying  commissions,  however,  are  frequent  in  oversea  markets 
where  the  medium  of  auctions  is  used  to  dispose  of  produce, 
as  for  instance  in  buying  tin,  coffee,  indigo  in  Dutch  East  Indies, 
wool  in  Australia  and  South  Africa,  since  the  price  paid  by  the 
commission  man  can  be  easily  controlled. 

Less  frequently  is  the  exporter  overseas  called  upon  to  act 
as  a  selling  commissioner.  A  case  in  point  is  when  the  exporter 
has  his  own  establishment  in  Europe  and  America  and  accepts 
a  shipment  on  consignment.  This  is  done  sometimes  when  the 
producer  desires  to  receive  an  advance  from  the  exporter. 
This  is  not  a  usual  proceeding,  however,  for  exporters  prefer 
to  take  advantage  of  a  producer's  need  of  funds  to  buy  cheaply 
for  cash,  whereas  it  is  the  banks  that  make  of  specialty  of  ad- 
vancing funds  against  produce. 

Occasionally  the  exporters  overseas  and  the  importers  in 
Europe  and  America  form  a  combination,  whereby  the  first  at- 
tend to  the  purchase  and  the  latter  to  the  sale  of  a  commodity. 
A  variety  of  arrangements  are  possible  under  such  a  combina- 
tion, both  parties  being  interested  in  the  most  careful  and  profit- 
able disposition  of  the  shipment. 


OVERSEA  MIDDLEMEN  12tf 

4.    Middlemen  Intervening  Between  Oversea  Producers 
and  Oversea  Exporters. 

The  exporter  in  the  strict  sense  of  the  term  does  not  always 
buy  direct  from  the  producer  when  shipping  oversea  products 
to  industrial  countries  as  United  States  and  Europe.  He  may 
do  it  in  the  case  of  such  producers  as  large  plantations,  or  where 
a  wholesale  merchant  class  is  lacking,  as  in  the  South  Sea 
Islands ;  and  as  a  rule  the  exporter  buys  direct  from  mining  en- 
terprises or  manufacturers.  But  indirect  buying  prevails  in  the 
purchase  of  oversea  exporters  for  shipment  of  most  oversea  pro- 
duce to  industrial  countries. 

Several  middlemen  intervene  between  the  producer  and  the 
exporter.  These  buy  up  the  produce  in  smaller  places  and 
concentrate  it  in  the  more  prominent  trading  centers.  Here  they 
partly  sort  and  pack  it  for  export.  In  India,  for  instance, 
the  small  grower  or  even  the  small  trader  takes  jute  to  the 
bazaar  in  Calcutta;  here  it  is  bought  by  the  baler  who  cleans  it, 
sorts  it  and  packs  it,  places  his  native  mark  upon  it  and  only 
then  sells  it  to  the  exporter;  though  some  exporters  do  their 
own  packing.  Even  so  in  China  tea  and  silk  are  assorted  by 
qualities  and  receive  their  "chop"  from  the  native  trader.  In 
the  case  of  tea  the  trader  does  not  even  buy  direct  from  the  pro- 
ducer, but  from  a  "collector."  In  the  Brazilian  coffee  business 
between  the  planter  and  the  exporter  appears  a  "commissario," 
and  sometimes  the  "ensaccador"  who  packs  the  coffee  into  sacks. 
In  Buenos  Ayres  the  "barraqueo," — the  owner  of  a  warehouse 
and  packer — receives  the  wool  from  growers  on  consignment,  sell- 
ing it  to  exporters.  Similarly  acts  the  selling  broker  in  Sydney 
and  Melbourne.  In  Australia  and  South  Africa  storekeepers  oc- 
casionally buy  the  wool  in  small  quantities.  On  the  West  Coast 
of  Africa  the  caravan  trade  turns  over  to  the  exporter  goods 
which  it  receives  in  barter  for  imported  articles  while  traveling 
through  the  interior.  On  the  East  Coast  of  Africa,  particularly 
in  Zanzibar,  the  Hindu  trader  has  developed  into  a  middleman. 

Exporters  in  the  strict  sense  of  the  term  shipping  produce 
from  overseas  to  industrial  countries  generally  buy  the  com- 
modities which  they  ship  in  the  immediate  vicinity  of  their  place 
of  business.    To  buy  in  the  interior  or  in  minor  coast  points  re- 


™0  INTERNATIONAL  COMMERCE 

quires  the  opening  of  buying  branches  or  agencies  or  the  send- 
ing out  of  special  buyers,  as  it  is  usually  impracticable  and  un- 
safe to  buy  by  correspondence  (excepting  in  the  case  of  large 
producers  and  traders  of  European  or  American  training) .  There 
is  also  danger  in  entrusting  subordinates  with  buying  oversea 
products.  But  the  closer  the  exporter  comes  to  the  producer 
the  more  cheaply  he  can  buy  and  the  more  readily  can  he  con- 
trol the  quality  of  the  commodity.  For  this  reason  export 
houses  in  Shanghai  maintain  buying  agencies  in  several  Chinese 
treaty  ports,  and  tea  exporters  send  out  their  own  buyers  into 
the  interior. 

Where  a  suitable  series  of  intermediate  links  between  the  pro- 
ducer in  the  interior  and  the  exporter  in  the  principal  shipping 
port  is  lacking,  a  buying  organization  in  the  interior  is  a  neces- 
sity. This  is  also  true  in  the  case  of  commodities  bought  for 
re-export  in  oversea  trade.  Commodities  drawn  from  producing 
territories  to  the  export  shipping  center  are  almost  entirely 
handled  by  native  or  semi-native  firms  before  they  reach  the  ex- 
porter, where  the  wholesale  "trade  in  the  producing  territory  and 
in  the  export  shipping  center  is  recruited  from  other  than 
Europeans  or  Americans.  Thus  Indian  produce  which  is  re- 
exported from  Singapore  to  various  destinations  through  the 
European  exporters  there  is  handled  by  Chinese  wholesalers, 
being  gathered  by  them  from  their  fellow  countrymen  through- 
out the  Indian  archipelago.  Similar  conditions  prevail  in  Bombay, 
Shanghai,  Singapore,  etc.  Only  where  in  the  producing  territo- 
ries exists  a  body  of  large  producers  or  wholesale  merchants  of 
European  or  American  training  will  the  exporter  in  the  oversea 
re-export  trade  enter  into  direct  relations  with  them  on  a  large 
scale,  as  in  Sydney,  in  re-export  to  the  South  Sea  Islands,  and 
in  Buenos  Ay  res,  in  re-export  to  Paraguay  and  Uruguay. 

Middlemen  between  exporters  and  producers  often  inter- 
vene in  the  production  of  oversea  products  by  furnishing  loans 
and  advances  to  producers.  The  producer  who  receives  such 
loans  or  advances  must  offer  hypothecary  security;  he  may 
hypothecate  his  expected  crop  to  the  exporter,  as  is  done  in 
Brazil  on  the  basis  of  so-called  coffee  hypothecations,  or  he  may 
simply  bind  himself  to  turn  over  his  crop,  partly  or  altogether, 
to  the  exporter  at  a  stipulated  price.     Similarly  it  is  customary 


OVERSEA  EXPORT  CENTERS  131 

to  give  advances  to  middlemen  who  undertake  to  offer  their 
commodities  in  the  first  instance  to  the  grantor  of  the  advance. 
Through  such  financial  transactions  the  exporters  not  only  re- 
ceive a  handsome  interest  return  on  the  money  advanced  (in 
South  America  even  with  a  mortgage  on  the  crop  the  exporter 
receives  10  to  20%),  but  they  also  secure  a  supply  of  the  com- 
modities handled  by  them  at  more  advantageous  prices  ihan 
would  be  possible  were  the  sellers  independent  of  the  exporters. 
Public  marketing  institutions  are  another  source  of  purchase 
of  commodities  used  largely  by  exporters  as  the  wool  market  in 
Buenos  Ayres,  the  cotton  markets  in  the  interior  of  India,  auc- 
tions in  Dutch  East  Indies,  exchanges  such  as  in  Alexandria, 
in  various  places  of  South  America  and  Australia,  etc. 

5.  The  Growth  and  Development  of  Oversea  Export 
Centers  in  the  Shipment  of  Oversea  Products  to 
Europe  and  America. 

As  export  trading  centers  in  oversea  territories  the  prin- 
cipal are  the  sea  ports  and  river  cities  from  which  direct  ship- 
ment by  ocean  going  vessels  is  possible.  In  other  words  in  the 
oversea  export  trade  to  industrial  countries  the  important  point 
for  the  development  of  an  export  center  is  its  favorable  situation 
with  regard  to  outward  shipments.  Export  shipping  and  export 
trading  coincide  here.  Only  occasionally  do  we  find  minor  ports 
whence  commodities  are  shipped  to  Europe  or  America  though 
the  sale  is  effected  in  a  nearby  larger  port.  As  example  we  may 
mention  Bombay  from  where  cotton  is  sold,  though  the  shipment 
may  be  made  from  several  minor  Indian  ports.  A  similar  con- 
dition prevails  in  Shanghai. 

Goods  that  are  shipped  out  from  minor  ports  which  are  not 
trading  centers  are  frequently  first  taken  to  a  trading  center, 
there  transshipped,  sorted,  packed  and  finally  shipped  out.  Im- 
portant trading  points  afar  from  ports,  as  Cairo  or  Delhi,  are  of 
consequence  only  from  the  point  of  view  of  import. 

The  reasons  for  this  development  of  ports  as  not  only  cen- 
ters of  export  shipment  but  also  of  export  trading  in  the  export 
of  products  from  oversea  territories  to  industrial  countries  are 
several :    first,  it  is  important  to  control  the  manipulation  of 


132  INTERNATIONAL  COMMERCE 

such  goods  in  the  shipping  port;  the  second  reason  is  in  the 
organization  of  freight  traffic  in  oversea  countries.  The  ex- 
porter is  seldom  in  a  position  to  collect  and  to  sort  the  goods 
properly  in  interior  points  of  those  countries.  This  is  generally 
done  in  the  port  of  shipment.  It  is  a  delicate  proposition,  re- 
quiring much  knowledge  of  commodities,  which  freight  for- 
warders in  such  territories  do  not  as  a  rule  posses.  Again  it  is 
the  practice  in  this  business  to  charter  ships  for  shipment,  and 
it  is  important  to  have  the  goods  packed  and  warehoused  as 
close  to  the  points  of  shipment  as  possible.  Finally  there  is  a 
historic  reason  to  be  mentioned.  The  original  settlements  of 
European  and  American  exporters  overseas  were  on  the  coast 
where  the  protection  of  men-of-war  was  available,  whereas  set- 
tlement in  the  interior  was  too  unsafe.  Thus  the  export  trade 
in  native  produce  developed  first  from  the  coast  and  the  inter- 
course with  the  interior  was  left  to  natives.  In  many  territories 
this  stage  of  commercial  organization  still  prevails.  In  others, 
though  the  foreign  merchants  finally  settled  down  in  the  interior, 
they  opened  branches  on  the  coast  for  attention  to  export,  as  in 
Colombia  and  other  Latin-American  places. 

The  importance  of  the  export  shipping  centers  in  oversea 
countries  shipping  to  Europe  or  America  depends  upon  the  extent 
of  the  territory  from  which  goods  may  be  most  advantageously 
supplied  to  it  thanks  to  natural  routes  and  to  artificial  media,  upon 
the  extent  of  the  exportable  production,  upon  the  favorable  loca- 
tion with  regard  to  shipment  to  customer  countries,  upon  shipping 
connections,  upon  the  energy  and  efficiency  of  its  merchant  com- 
munity, upon  political  considerations  such  as  export  duties  in 
the  exporting  country  and  import  duties  in  the  importing  coun- 
tries. These  duties  are  a  hindrance,  free  trade  is  an  aid  to  re- 
export, as  for  instance  in  case  of  Hongkong.  The  international 
character  of  an  export  shipping  center  from  the  point  of  view 
of  purchasing  is  observable  if  from  that  export  shipping  center 
goods  of  more  than  one  country  are  shipped  to  industrial  coun- 
tries. Examples  of  this  are  Singapore,  Hongkong,  Zanzibar, 
Buenos  Ayres,  or  where  the  tributary  territory  is  exceedingly 
large,  as  in  Rio-de- Janeiro,  Bombay,  Calcutta,  Shanghai,  Batavia. 
From  the  point  of  view  of  sales  the  international  importance  of 
an  export  shipping  center  depends  upon  the  commercial  ramifica- 


OVERSEA  EXPORT  CENTERS  133 

tions  it  maintains  with  countries  buying  the  commodities  shipped 
from  there  and  upon  the  ability  of  the  export  shipping  point  to 
influence  the  price  of  goods  shipped  from  there. 

An  oversea  export  shipping  center  has  the  ability  of  in- 
fluencing the  price  of  commodities  shipped  from  it  when 
the  export  community  settled  there  is  financially  independent  of 
import  trading  centers  abroad  and  makes  its  own  offers  to  cus- 
tomer countries  either  through  agents  or  by  correspondence  and 
cable;  when  the  producers  and  wholesalers  of  the  exporting 
country  are  sufficiently  well  organized  and  possess  the  necessary 
training  and  experience  to  protect  their  interests,  remaining  in- 
dependent of  the  exporter  in  the  strict  sense  of  the  term ;  which 
means  that  at  the  time  they  effect  a  sale  they  are  not  indebted 
to  the  exporters,  nor  are  forced  to  sell  their  goods  to  the  export- 
ers until  such  time  as  it  is  convenient  for  them ;  when  the  trad- 
ing community  maintains  produce  exchanges  or  other  associations 
for  the  regulation  or  market  prices  and  the  protection  of  their 
interests. 

But  where — as  in  the  case  of  certain  export  shipping  points 
of  the  Dutch  East  Indies  in  relation  to  Netherlands — the  export 
community  depends  financially  upon  connections  in  one  or  more 
importing  centers  abroad,  when  export  is  carried  on  by  means 
of  consignments  and  with  the  financial  assistance  of  the  importer, 
the  price  is  influenced  by  the  importing  center  and  the  commer- 
cial importance  of  the  export  shipping  point  is  weakened.  Under 
such  circumstances  it  is  even  apt  to  lose  international  import- 
ance, maintaining  connections  perhaps  with  one  country  solely, 
or  pre-eminently,  as  the  Dutch  East  Indian  ports,  Saigon, 
Algiers,  etc. 


CHAPTER  VIII. 

II.    The  Organization  of  the  Import  Trade  in  Over- 
sea Products. 

b.  the  commercial  connections  between  the  exporting 
countries  overseas  and  the  industrial  countries  of 
europe  and  the  united  states  in  the  shipment  of 
oversea  products. 

We  may  parallel  here  the  consideration  of  the  commercial 
connections  between  the  exporting  and  the  importing  country  as 
already  described  in  the  export  trade  in  manufactured  products 
from  Europe  and  America  to  what  is  usually  termed  the  export 
field,  and  regard  these  connections  from  the  point  of  view  of  the 
buyer's  and  the  seller's  initiative. 

i.    Connections  Initiated  by  the  Buyers. 

a)  Buying  trips.  On  account  of  the  great  cost  of  undertak- 
ing buying  journeys  to  oversea  countries,  these  are  not  very- 
frequent  in  the  import  trade  of  Europe  and  of  United  States 
but  are  undertaken  nevertheless  in  special  instances,  such  as  wool 
auctions  in  Australia,  indigo  auctions  in  Calcutta,  tobacco  auc- 
tions in  Sumatra,  etc.,  where  the  personal  intervention  of  a 
prominent  buyer  may  have  some  effect  upon  the  price  or  other 
commercial  advantages  may  be  gained.  Where  the  buying  trip 
is  undertaken  by  an  employee,  a  person  of  thorough  technical 
knowledge  and  enjoying  the  thorough  confidence  of  his  principal 
is  chosen. 

b)  Buying  agents  domiciled  in  the  oversea  country.  Where 
the  European  or  American  importer  buys  from  an  oversea  ex- 
porter in  the  strict  sense  of  the  term,  the  services  of  a  domi- 
ciled buying  agent  on  commission  basis  are  unnecessary.  But 
where  the  services  of  a  buying  agent  are  employed,  the  latter 
is  generally  called  upon  to  make  cash  payments  for  the  products 
bought,  and  a  person  enjoying  the  thorough  confidence  of  the 


IMPORT  CONNECTIONS  185 

buying  firm  must  be  chosen.  The  practice  of  buying  oversea 
products  through  buying  agents  domiciled  overseas  is  compara- 
tively rare. 

c)  Buying  branches  and  purchasing  offices.  In  view  of  the 
difficulties  in  the  way  of  a  rational  purchase  of  oversea  pro- 
ducts, the  establishment  of  permanent  buying  offices  in  territories 
from  which  large  quantities  of  products  are  currently  bought  is 
a  frequently  employed  method.  Many  oversea  exporting  firms 
are  in  reality  branches  of  foreign  houses,  established  to  act  as 
purchasing  offices. 

d)  Correspondence.  While  the  importer  in  Europe  and 
America  and  the  exporter  overseas,  being  technically  trained 
businessmen,  find  no  inherent  difficulty  in  doing  business  by  cor- 
respondence (excepting  where  they  gain  time  by  using  the  cable), 
a  difficulty  exists  in  coming  to  an  agreement  as  to  the  quality  of 
goods,  and  the  fluctuation  of  prices  likewise  limits  the  utility  of 
correspondence  as  a  medium  of  connection.  Many  deals  require 
signatures  to  contracts,  and  the  business  cannot  await  the  slow 
process  of  mails,  and  for  this  reason  the  presence  of  an  author- 
ized representative  at  the  point  of  export  is  preferable. 

Suitable  for  treatment  by  correspondence  are  commodities 
which  have  quality  standards,  and  here  the  use  of  cables  is  of 
great  assistance.  Correspondence  between  importer  and  exporter 
as  a  sole  medium  of  connection  (with  the  aid  of  the  cable)  is 
customary  when  the  exporting  house  in  a  way  acts  as  a  repre- 
sentative of  the  importer,  and  vice  versa,  that  is  if  they  are  active 
one  for  the  other  as  buying  or  selling  agent,  such  a  relationship 
being  based  on  mutual  confidence. 

e)  Consignments.  This  is  an  important  feature  in  the  sale 
of  oversea  products  particularly  in  Europe  and  will  be  discussed 
in  detail  in  that  section  of  this  chapter  which  deals  with  the 
organization  in  the  importing  country. 

2.     Connections  Initiated  by  the  Seller. 

a)  Selling  trips.  These  are  entirely  unusual  in  the  sale  of 
oversea  products  to  industrial  countries.  There  is  no  need  for 
selling  trips  with  samples.  The  principal  selling  point  in  over- 
sea products  is  the  price.     Prices  in  this  connection  being  a  flue- 


186  INTERNATIONAL  COMMERCE 

tuating  element,  there  is  little  advantage  in  having  a  representa- 
tive moving  from  place  to  place,  as  traveling  salesmen. 

A  resident  representative  is  much  more  to  the  point,  for 
he  can  submit  price  quotations  to  the  entire  trade  concerned 
throughout  the  season.  There  is  in  the  sale  of  oversea  pro- 
ducts to  Europe  and  America  no  incentive  of  controlling  the 
activity  of  the  sales  agent  or  of  watching  the  business  through 
occasional  personal  intervention  of  a  traveling  agent,  as  is  advis- 
able in  the  export  of  manufactured  products  to  oversea  mar- 
kets, particularly  as  the  agents  in  Europe  and  America  as  a  rule 
are  more  reliable  and  more  likely  to  be  experts  in  their  line. 
In  place  of  a  selling  trip  with  samples  or  a  stock  of  goods,  we 
have  here  preferably  the  consignment  business,  though  even  this 
is  giving  way  to  more  modern  selling  methods. 

b)  Selling  agents  domiciled  in  the  importing  country.  In 
the  import  trade  of  Europe  and  America,  though  more  so  in  the 
case  of  Europe  than  of  America,  the  connection  between  the 
oversea  exporter  and  the  European  and  American  importers  is 
largely  maintained  through  selling  agents  domiciled  in  Europe 
and  in  America.  This  method  effects  a  great  saving  in  expense, 
as  cabling  is  concentrated  upon  one  recipient,  which  is  an  im- 
portant consideration  as  in  some  lines  it  is  customary  to  make 
daily  price  offers ;  the  salesman  is  in  receipt  of  quality  samples 
in  the  beginning  of  the  season;  this  enables  the  exporter  to 
reach  many  even  smaller  customers;  the  domiciled  sales  agent 
through  his  personal  intervention  can  best  utilize  the  changing 
market  conditions;  he  also  acts  as  a  confidential  man  who  may 
exchange  contract  signatures  with  the  buyer,  or  maintain  the  in- 
terests of  the  seller  in  the  case  of  disputes  as  to  the  quality  of 
the  goods,  etc. 

Some  oversea  products  cannot  be  advantageously  sold  through 
the  exporter's  representative  resident  in  the  country  of  import. 
This  is  the  case  when  the  products  are  either  of  too  high  an  in- 
trinsic value,  or  too  individual  in  character  to  be  suitable  for 
negotiations  at  long  range  without  inspection  or  examination  by 
the  buyer.  Only  such  products  are  suitable  for  long  range  ne- 
gotiations in  which  definite  standard  types  have  been  established 
and  accepted  by  commercial  usage.  Another  instance  of  oversea 
products  which  are  unsuitable  for  negotiations  through  selling 


mroRT  or  oversea  products  187 

representatives  resident  in  the  country  of  import  is  where  the 
exporter  is  located  too  far  out  of  the  way  of  the  great  world 
trade  routes  and  ships  irregular  quantities  of  products  at  irre- 
gular intervals.  In  such  cases  it  is  far  more  advantageous  for 
the  exporter  to  sell  his  products  after  arrival  at  destination,  pre- 
ferably on  consignment.  If  the  exporter  has  his  own  establish- 
ment in  Europe  or  in  America  it  eliminates  the  necessity  of  a 
resident  selling  representative,  at  least  as  far  as  the  sphere  of 
the  activity  of  that  establishment  is  concerned.  Beyond  that  he 
may  appoint  agents  who  would  be  subordinate  to  his  European 
or  American  establishment. 

It  is  customary  for  oversea  exporters  who  find  it  advantage- 
ous to  employ  resident  representatives  in  Europe  or  America  to 
have  these  located  in  the  most  prominent  import  centers.  These 
agents  as  a  rule  specialize  in  the  class  of  produce  which  they 
handle.  In  view  or  the  great  volume  of  individual  transactions 
in  the  import  of  oversea  produce,  such  specialization  is  generally 
profitable,  and  this  specialization  is  largely  due  to  the  fact  that 
handling  such  produce  presupposes  a  very  thorough  technical 
knowledge  of  each  commodity. 

c)  Sales  offices.  As  we  have  already  seen,  in  the  rela- 
tions between  the  European  importer  and  the  oversea  exporter, 
the  European  or  American  house  is  either  the  parent  establish- 
ment or  the  financing  establishment  of  the  oversea  exporter. 
The  reverse  is  very  infrequent.  Therefore  the  activity  of  the 
European  or  American  house  is  largely  that  of  a  sales  branch, 
either  concluding  business  for  future  shipment,  whether  the  ex- 
porter has  or  has  not  at  the  time  purchased  and  taken  possession 
of  the  products  sold,  or  acting  as  a  sales  commission  firm,  ac- 
cepting goods  on  consignment  or  selling  them  while  afloat.  It 
is  more  customary  to  use  such  connections  than  commission 
agents  in  the  strict  sense  of  the  word,  for  if  the  goods  prove 
saleable  with  difficulty,  the  exporter's  own  connection  can  s>ore 
them  in  own  warehouses,  saving  warehousing  charges,  and  be- 
cause of  the  sales  commission  thus  saved  for  the  firm's  own 
parent  house. 

From  the  foregoing  we  see  that  in  the  sale  of  oversea  pro- 
ducts in  European  countries  or  in  America,  the  principal  import- 


138  INTEKNATIONAL  COMMEECE 

ance  is  to  be  attributed  to  sales  agencies,  to  the  consignment  busi- 
ness, and  to  branch  or  parent  establishments  in  Europe  or  in 
America. 

C.  THE  ORGANIZATION  IN  THE  IMPORTING  COUNTRY  IN  THE  IM- 
PORT OF  OVERSEA  PRODUCTS  TO  INDUSTRIAL  COUNTRIES  OF 
EUROPE  AND  TO  UNITED  STATES. 

I.  The  Role  of  the  Importers  of  Various  Classes. 

Maintaning  our  division  of  importers  into  two  groups,  im- 
porters in  the  widest  sense  of  the-  term,  and  importers  in  the 
strict  sense  of  the  term,  we  must  include  among  the  former  the 
following : 

European  and  American  consumers,  such  as  important 
manufacturers  who  buy  their  own  raw  products  abroad,  whole- 
salers and  retailers  who  are  principally  engaged  in  domestic 
trade  and  only  incidentally  import  foreign  goods,  European  and 
American  branches  of  foreign  producers  which  are  not  at  the 
same  time  engaged  in  strictly  commercial  operations  on  a  large 
scale,  governments  which  import  the  products  of  their  own  colo- 
nies, in  order  to  sell  them  in  the  mother-land  through  the  com- 
mission trade,  banks  which  occasionally  receive  goods  on  con- 
signment without  making  a  specialty  of  the  import  business. 

Among  these  the  principal  importance  must  be  attached  to 
the  great  industrial  enterprises  which  increasingly  engage  in  the 
direct  import  of  their  supplies  of  raw  products,  particularly  in  the 
case  of  bulk  products.  This  is  facilitated  by  the  army  of  sales 
agents  which  oversea  producers  maintain  for  cultivating  this 
trade,  selling  their  products  on  the  basis  of  c.  i.  f.  contracts.  In 
recent  years  these  consumers  have  been  in  the  habit  of  charter- 
ing ships  and  even  of  sending  out  buying  agents  for  the  purpose 
of  arranging  for  these  imports. 

The  principal  obstacle  in  the  way  of  such  direct  dealings  is 
that  the  ordinary  run  of  manufacturers  are  averse  to  assuming 
the  risk  of  importing.  Apart  from  price  fluctuations  the  import 
risk  includes  the  possibility  of  quality  disputes  or  deterioration  of 
the  goods  or  of  quantity  disputes,  the  risk  of  the  loss  of  entire 
shipment,  in  which  case  the  insurance,  though  covering  the 
financial  loss,  may  not  overcome  the  inconvenience  of  the  non- 


IMPORT  OF  OVERSEA  PRODUCTS  18» 

arrival  in  time  of  required  raw  products;  the  risk  of  being 
forced  to  accept  shipments  of  inferior  quality,  though  it  be 
against  the  re-imbursement  of  price  difference;  the  risk  of  be- 
ing forced  to  pay  an  over-price  in  case  of  the  average  quality  of 
goods  shipped  exceeding  that  on  the  basis  of  which  the  sale  had 
been  effected. 

Such  risks  are  usually  readily  borne  by  the  importer,  because 
in  reselling  he  can  generally  obtain  the  full  market  value  of  the 
commodity,  but  they  are  an  inconvenience  to  a  manufacturer  who 
generally  needs  a  specified  product  at  a  specified  time.  In  case 
it  is  not  fully  available  he  has  not  the  same  facilities  as  the  im- 
porter in  re-selling,  and  may  be  compelled  to  procure  a  sub- 
stitute at  much  expense.  He  may  be  at  times  compelled  to  de- 
lay his  production,  and  insurance  and  other  re-imbursements 
cannot  begin  to  cover  his  loss  in  that  respect.  Other  obstacles 
in  the  way  of  direct  relations  between  oversea  exporters  and 
European  and  American  manufacturers  and  producers  as  im- 
porters of  oversea  products  for  their  own  consumption  are  the 
inadequate  assortments,  the  excessive  minimum  quantities  of 
each  grade,  the  requirements  of  exporters  to  establish  a  short 
term  acceptance  credit  in  London  or  New  York.  The  last  two 
points  affect  smaller  manufacturers  more  than  they  do  a  large 
manufacturer. 

Similarly  smaller  wholesalers  and  jobbers,  such  as  inland 
wholesalers  in  colonial  products,  find  it  difficult  to  maintain  di- 
rect relations  with  oversea  exporters.  For  this  reason  these 
smaller  wholesalers  buy  from  importers  (generally  before  the 
arrival  of  the  goods  in  Europe  or  America)  on  so-called  import 
terms,  and  while  they  thus  assume  a  part  of  import  risk,  this 
method  of  doing  business  can  hardly  be  called  direct  importing. 
Finally  governments,  such  as  for  instance  maintain  tobacco  or 
match  monopolies,  appear  as  direct  importers,  but  these  must  be 
counted  among  industrial  enterprises  importing  for  their  own 
use. 

Thus  we  find  among  importers  in  the  widest  aspect  of  the 
term,  the  great  industrial  enterprises  as  the  most  prominent,  and 
we  can  now  take  for  consideration  the  activities  of  importers 
in  the  strict  sense  of  the  term. 

Importers  in  the  strict  sense  of  the  term  are  divided  into 


HO  INTEENATIONAL  COMMEECE 

two  groups.  In  the  first  group  we  find  wholesalers  and  some 
retailers  (such  as  department  stores)  keeping  stocks  and  doing 
a  large  domestic  business,  in  one  or  more  lines  of  goods,  and 
procuring  a  part  of  their  wares  from  oversea  sources.  In  the 
sales  of  oversea  products,  particularly  in  what  is  known  as  colo- 
nial goods,  there  is  a  wide  range  of  variety  among  them.  Some 
handle  a  single  line,  such  as  tobacco,  others  several  lines,  as 
coffee,  tea,  rum  and  sugar,  or  tea  and  indigo,  or  coffee  and  sugar. 
The  fact  that  such  importers  maintain  stocks  stamps  them  as 
merchants  for  own  account.  They  buy  their  goods  direct,  put 
them  in  stock  where  they  submit  them  to  some  sort  of  treatment, 
such  as  thorough  assortment,  cleaning,  mixing,  external  changes, 
such  as  coloring  coffee;  then  they  sell  from  stock,  frequently 
under  their  own  quality  brands.  Oversea  buying  and  selling 
commissions  do  not  enter  into  the  routine  of  such  an  import  busi- 
ness, at  least  not  regularly,  although  occasionally  importers  en- 
gage in  activities  such  as  would  lead  to  their  classification  in 
both  groups  of  importers  in  the  stricter  sense  of  the  term. 

The  importers  of  this  first  group  generally  carry  on  an  ex- 
tensive selling  business.  Their  customers  are  largely  wholesalers 
of  the  lesser  type,  producers  and  manufacturers  and  some  of 
the  large  retailers.  They  appoint  sales  agents,  solicit  business 
by  correspondence,  sometimes  maintain  traveling  salesmen,  and 
in  some  rare  cases  have  a  network  of  retail  establishments.  They 
buy  their  oversea  products  on  the  basis  of  import  contracts,  en- 
deavoring to  procure  them  from  oversea  exporters  at  first  hand, 
or  through  the  exporters'  European  and  American  representa- 
tives. Sometimes  they  buy  from  importers  in  the  strictest  sense 
of  the  term.  Occasionally  they  buy  any  lots  of  the  commodities 
in  which  they  trade  that  happen  to  be  procurable  in  Europe  or 
America. 

They  buy  largely  from  planters  and  other  producers,  over- 
sea exporters,  consignees.  They  buy  often  at  auctions ;  the  goods 
bought  by  them  are  unimproved,  that  is  not  re-packed  or  as- 
sorted. 

This  class  of  importers  play  a  large  role  in  the  import  of 
oversea  products. 

The  second  group  of  importers  in  the  stricter  sense  of  the 
terms  may  be  termed  importers  properly  speaking.     These  are 


IMPORT  OF  OVERSEA  PRODUCTS  141 

merchants  who  do  exclusively  or  predominantly  an  import  busi- 
ness, selling  to  wholesalers  or  to  importers  of  the  type  just  dis- 
cussed; they  seldom  carry  stocks  and  as  a  rule  do  not  exclude 
any  variety  of  imported  goods  from  their  operations. 

This  class  of  importers  includes  business  houses  which  do 
exclusively  an  import  business,  or  exclusively  an  import  and 
export  business,  that  is  they  import  oversea  products  for  sale  at 
home  and  export  home  products  for  sale  overseas,  but  do  not 
distribute  home  products  among  home  consumers.  They  may 
have  their  own  branch  establishments  abroad,  or  they  maintain 
a  twofold  relationship  to  their  business  friends  in  the  industrial 
country,  namely  in  the  directions  both  of  import  and  export ;  to 
this  class  of  importers  we  must  also  reckon  European  and  Amer- 
ican establishments  of  enterprises  exploiting  the  natural  re- 
sources of  oversea  countries  alongside  with  the  carrying  on  of 
commercial  operations;  banks  and  other  institutions  which  re- 
ceive consignments  of  oversea  products  as  cover  for  loans. 

This  last  named  class  of  importers  is  frequently  found 
among  the  financial  institutions  in  European  ports  of  entry  for 
oversea  products.  We  find  also  in  New  York  and  New  Orleans 
private  banks  which  are  also  import  merchants  or  import  and 
export  merchants  on  a  large  scale  granting  loans  to  oversea  pro- 
ducers and  receiving  consignments  of  goods  in  return. 

Importers  in  the  strictest  sense  of  the  word,  or  importers 
properly  speaking,  may  act  for  own  account  or  in  the  capacity 
of  commission  agents.  As  merchants  for  own  account  they  may 
import  oversea  products  for  sale  after  arrival.  This  is  done  gen- 
erally by  firms  which  have  their  own  establishments  in  the  ex- 
porting oversea  country,  and  preferably  in  staple  articles.  In 
articles  subject  to  speculation,  as  for  instance  coffee,  importers 
in  the  strictest  sense  of  the  term  make  their  sales  to  the  whole- 
sale trade  usually  before  arrival  at  the  port  of  destination.  Im- 
porters of  this  group  seldom  undertake  any  sorting  or  other 
manipulations  of  the  goods  imported. 

Acting  on  commission  basis,  importers  of  this  group  may  be 
regarded  either  as  buying  or  as  selling  commissioners. 

Buying  oversea  products  on  commission  is  not  a  usual  mode 
of  procedure  among  importers  of  this  class.  They  do  this  at 
times  when  they  can  turn  over  the  order  to  buy  oversea  products 


142  INTERNATIONAL  COMMERCE 

to  a  branch  establishment  of  their  own  overseas,  or  when  they 
accept  orders  from  manufacturers  to  purchase  some  raw  pro- 
ducts overseas.  While  in  the  latter  case  they  are  commissioned 
to  buy,  the  transaction  itself  is  not  usually  carried  out  on  a 
commission  basis,  in  other  words  the  importer  appears  as  a  mer- 
chant for  his  own  account.  The  responsibility  and  the  quality 
guarantee  which  he  assumes  make  it  undesirable  for  him  to  con- 
tent himself  with  a  percentage  basis  remuneration. 

But  importers  of  oversea  products  operate  very  largely  as 
Felling  commissioners,  provided  they  do  not  maintain  their  own 
buying  establishments  or  producing  enterprises  overseas.  This 
selling  commission  relation  with  oversea  exporters  is  based  to  a 
great  extent  upon  the  practice  of  consigning  oversea  products. 
This  is  due  to  the  following  circumstances : 

The  principal  function  of  importers  in  the  strictest  sense 
of  the  word  is  to  finance  the  export  business  from  oversea  pro- 
ducing territories  to  European  and  American  markets.  This 
financing  is  effected  by  means  of  advances  to  oversea  exporters 
for  the  purchase  of  European  or  American  manufactured  goods 
or  supplies,  by  shipments  of  European  and  American  machinery 
and  other  manufactured  goods  on  credit,  or  by  furnishing  credits 
for  such  shipments  to  manufacturers  in  behalf  of  oversea  buyers. 
This  establishes  a  sort  of  a  dependance  relationship  on  the 
part  of  the  .oversea  exporters  towards  the  importers  in  Europe 
or  America.  For  this  reason  they  must  consign  their  products 
to  the  importers  in  Europe  or  America,  so  that  the  latter  may 
be  secured  by  the  turning  over  of  shipping  documents  to  their 
oversea  bank  or  representative,  and  later  by  the  receipt  of  the 
merchandise  itself.  In  due  course  the  merchandise  is  sold  and 
the  importer  reaps  a  profit  without  having  run  any  other  risk 
than  that  of  granting  credit  against  a  good  security. 

The  consignment  business  is  an  advantage  to  the  oversea  ex- 
porters from  the  point  of  view  of  affording  them  about  the  only 
rational  means  of  exporting  to  Europe  and  America  without 
having  there  branches  of  their  own.  It  is  more  difficult  to  sell 
oversea  products  in  Europe  and  America  without  representa- 
tion than  European  and  American  manufactured  products  in 
oversea  markets,  and  for  this  reason  consignment  business  is 
more  usual  in  the  export  of  oversea  products  to  Europe  and 


IMPORT  OF  OVERSEA  PRODUCTS  143 

America  than  in  the  export  of  European  and  American  manu- 
factured goods  to  oversea  markets. 

Another  reason  for  the  prevalence  of  consignment  business 
in  the  export  of  oversea  products  to  industrial  countries  is  in 
the  practice  of  establishing  price  quotations  for  certain  of  these 
products  at  auctions  which  offer  the  buyers  an  opportunity  to 
cover  their  demands  immediately  and  at  current  prices.  !  f  a 
British  spinner  were  to  purchase  a  shipment  of  wool  from 
Australia  before  the  periodic  auction  of  wool  in  London  has 
established  a  market  price,  he  would  run  risk  of  loss,  since  the 
London  auction  may  establish  a  lower  market  price  of  wool  than 
that  paid  by  the  spinner. 

Occasionally  an  oversea  exporter  who  has  no  branch  of  his 
own  in  Europe  or  America  sends  out  a  shipment  of  his  products 
in  the  hope  of  selling  it  while  afloat.  In  this  he  may  be  dis- 
appointed, and  he  turns  it  over  to  an  importer  on  consignment. 
This  is  also  done  when  his  customer  refuses  a  shipment  either 
because  of  real  or  imaginary  complaints  or  because  of  inability 
to  pay  for  it. 

In  addition  to  these  specific  causes,  there  are  several  other 
reasons  which  account  for  the  prevalence  of  the  consignment 
business  in  raw  products  shipped  from  oversea  producing  ter- 
ritories to  industrial  countries  as  compared  with  the  shipment 
of  European  and  American  manufactured  products  to  oversea 
markets. 

The  principal  reason  is  that  the  former  is  less  risky  than 
the  latter.  There  is  less  danger  of  loss  of  money  to  the  con- 
signor in  the  shipment  of  oversea  products  to  Europe  and  Amer- 
ica on  consignment  than  in  the  shipment  of  manufactured  goods 
to  oversea  markets  on  consignment,  even  granting  that  raw 
products  are  more  subject  to  price  fluctuation  than  manufactured 
goods.  In  the  first  place  the  demand,  the  purchasing  power  and 
the  purchasing  eagerness  in  Europe  and  America  for  oversea 
products  is  more  uniform  than  that  which  prevails  overseas  in 
regard  to  imported  manufactured  goods.  There  exists  a  wider 
opportunity  for  disposing  of  consignments  in  Europe  and  Amer- 
ica at  reasonable  prices.  Secondly,  European  and  American 
consignees   are   financially   better   situated   and  show    a  greater 


144  INTERNATIONAL  COMMERCE 

average  of  responsibility  and  reliability  than  consignees  overseas 
receiving  manufactured  goods. 

Thirdly,  the  reports  of  auctions,  the  daily  market  quotations 
permit  a  greater  control  of  the  prices  secured  by  consignees  in 
Europe  and  America  than  in  the  sale  of  manufactured  goods  by 
oversea  consignees. 

For  this  reason  the  consignment  business  is  most  flourish- 
ing in  those  import  trading  centers  where  in  addition  to  lively 
financial  relations  with  oversea  markets  the  practice  of  holding 
auctions  of  oversea  products  is  most  prevalent.  This  is  prin- 
cipally the  case  in  London. 

Importers  of  this  group  are  often  specially  equipped  to  carry 
out  selling  operations  in  oversea  products  on  a  large  scale,  by 
means  of  auctions  or  by  offering  same  for  public  bids.  For  this 
reason  it  often  happens  that  importers  in  the  broader  aspect  of 
the  term,  such  as  planters  maintaining  their  own  branches  in 
Europe  or  America,  or  governments  such  as  the  Congo  Admin- 
istration in  Belgium,  turn  over  their  imports  to  these  importers 
for  sale  on  commission  basis. 

In  many  lines  of  oversea  products,  particularly  in  English 
practice,  it  is  customary  for  importers  to  call  themselves  brokers. 
Apart  from  the  fact  that  these  importers  indeed  operate  as 
brokers  by  way  of  a  side  line,  this  designation  is  intended  to 
indicate  that  they  sell  oversea  produce  for  the  account  of  others 
without  employing  third  parties  as  brokers,  but  acting  as  brokers 
themselves.  But  since  they  assume  independent  contractual 
obligations  in  receiving  products  from  overseas,  they  are  to  be 
considered  as  selling  commissioners  rather  than  brokers. 

The  customers  of  the  importers  in  the  strictest  sense  of  the 
term  are  mostly  wholesalers,  particularly  those  specializing  in 
certain  classes  of  merchandise.  Many  of  these  wholesalers  do 
also  some  direct  importing  for  their  own  account.  But  in  im- 
port trading  centers  where  it  is  the  practice  to  finance  oversea 
exporters  on  a  large  scale,  and  where  the  importing  organization 
consists  of  firms  maintaining  their  own  branches  overseas,  the 
bulk  of  importing  is  done  by  the  importers  in  the  strictest  term 
of  the  word,  and  wholesalers  with  stocks  of  merchandise  cover 
their  requirements  for  imported  goods  by  buying  from  the  im- 
porters.    In  London,  for  instance,  there  is  a  wide  distinction 


IMPORT  OF  OVERSEA  PRODUCTS  146 

between  the  import  merchant  and  the  dealer,  which  term  is  ap- 
plied to  a  wholesaler  dealing  in  imported  goods  of  specific  classes 
and  carrying  a  stock  of  same. 

The  wholesale  dealer's  principal  business  is  to  act  as  a 
middleman  between  the  importer  in  the  strictest  sense  of  the 
word  and  the  buyers  in  the  interior;  it  is  his  business  to  seek 
customers,  to  note  their  requirements  and  by  purchases  from 
importers  to  make  up  the  needed  assortments. 

Since  importers  in  the  strictest  sense  of  the  term  handle  a 
variety  of  products  the  sale  of  which  requires  the  intervention 
of  experts,  and  since  their  principal  function  is  to  cultivate  re- 
lations with  oversea  markets,  and  they  are  thus  specialists  in  the 
form  of  the  business  rather  than  in  the  characteristics  of  all  of 
the  commodities  sold  by  them,  they  frequently  employ  brokers 
in  the  marketing  of  their  imports.  Brokers  are  specialists  and 
experts  both  for  the  merchandise  and  for  the  selling  methods 
prevailing  in  marketing  it.  It  is  their  business  to  value  and  ap- 
praise the  product,  to  draw  samples  from  each  shipment,  to  over- 
see the  required  manipulations,  to  keep  in  touch  with  and  to 
canvass  the  available  circle  of  customers  in  the  case  of  private 
sales  and  to  attend  public  sales  such  as  auctions.  In  the  case  of 
disputes  these  brokers  frequently  act  as  sworn  experts.  Where 
the  importers  in  the  strict  sense  of  the  term  lay  a  particular 
stress  on  the  financing  side  of  their  activity,  they  depend  to  a 
large  extent  upon  the  co-operation  of  brokers,  and  the  latter  play 
an  important  role  in  the  merchandizing  organization.  This  is 
true  to  a  large  extent  of  London. 

2.    The  Growth  and  Development  of  Import  Centers  in 
Europe  and  in  America. 

The  general  international  importance  of  an  import  trading 
center  in  Europe  and  in  America  in  handling  oversea  products 
depends  upon  the  volume  of  trading,  upon  the  extent  and  variety 
of  exporting  countries  shipping  their  products  to  it,  upon  the 
extent  and  variety  of  the  purchasing  territory  served  by  it,  and 
finally  upon  the  influence  it  exerts  upon  the  fixing  of  the  price 
of  commodities  in  the  world  market.  An  import  center  may 
be  the  destination  of  a  great  quantity  of  varied  products,  but  it 


146  INTERNATIONAL  COMMERCE 

may  serve  only  a  limited  territory,  for  instance  one  special  coun- 
try, as  Le  Havre.  Its  international  importance  is  then  one- 
sided, being  in  the  direction  of  purchase  rather  than  of  sale.  The 
influence  exerted  by  an  import  trading  center  is  conditioned 
by  the  quantity  of  import  traffic  passing  through  it,  but  not  by 
it  alone.  The  character  of  the  commercial  organization  centered 
therein,  the  activity  in  purchasing  in  oversea  producing  territories 
and  in  selling  oversea  products  through  private  and  public  sales, 
and  the  existence  of  commodity  exchanges  with  a  large  speculat- 
ing following  have  a  great  deal  to  do  with  the  exerting  of  in- 
fluence upon  the  world  market  price  of  commodities. 

The  specific  importance  of  an  import  trading  center  may 
relate  to  the  extent  of  its  participation  in  the  import  trade  from 
a  certain  oversea  territory,  or  to  the  supply  of  the  demand  for 
oversea  products  in  a  certain  purchasing  territory,  or  to  its  in- 
fluence upon  the  establishment  of  a  world  market  price  in  a  cer- 
tain specified  commodity.  Thus,  for  instance,  Antwerp  as  an 
import  trading  center  has  specific  importance  for  Congo  products 
and  for  South  American  wool. 

The  development  of  an  import  center  in  industrial  countries 
is  dependent  upon  the  extent  of  import  traffic  reaching  it  from 
oversea  territories,  upon  its  geographical  situation,  both  from 
the  point  of  view  of  economic  relations  and  the  artificial  traffic 
and  transportation  media  connecting  it  with  the  outside  world, 
upon  its  commercial  organization,  upon  commercial  usage  in  cer- 
tain commodities,  and  upon  political  factors. 

We  have  already  seen  that  in  the  import  trade  with  oversea 
products  reaching  industrial  countries,  local  sales  are  of  great 
importance.  That  is  imported  commodities  are  warehoused, 
manipulated,  sold  at  auctions,  or  disposed  of  to  wholesalers  who 
sort  and  stock  them  and  then  sell  to  the  inland  trade.  For  this 
reason  one  of  the  principal  pre-requisites  of  an  active  import  trad- 
ing center  is  its  suitability  as  a  warehousing  point.  Warehousing 
is  most  economically  and  conveniently  done  in  the  port  of  entry, 
so  that  it  is  generally  the  ports  of  entry  with  a  large  volume 
of  import  traffic  that  have  developed  into  import  centers  in  over- 
sea products.  But  it  is  not  always  the  import  receiving  center 
which  is  the  import  trading  center.     Rotterdam,  for  instance,  is 


IMPORT  OF  OVERSEA  PE0DU0T8  147 

far  more  important  as  a  center  of  import  entries  than  as  a  cen- 
ter for  the  distribution  of  imports. 

The  import  receiving  center  requires  a  favorable  geograph- 
ical situation  which  is  suitable  for  the  development  of  a  great 
maritime  traffic  and  a  favorable  situation  with  regard  to  the  ter- 
ritories of  distribution.  This  may  be  aided  by  the  construction 
of  canals  and  railways,  it  may  be  affected  by  customs  tariffs. 
The  geographical  situation  plays  an  important  part  in  the  com- 
petition between  the  importers  in  the  strict  sense  of  the  term 
and  their  customers  inland  who  may  seek  to  import  direct. 

The  commercial  organization  is  an  essential  factor.  The  ex- 
istence of  a  well  organized  import  trading  community  may  hold 
the  import  trade  even  if  conditions  favor  the  development  of  a 
seaport  as  the  goal  of  import  traffic.  Importers  who  finance  the 
oversea  exporters  in  their  operations  cannot  be  robbed  of  their 
connections  with  the  same  ease  as  importers  who  buy  on  the 
basis  of  c.  i.  f.  contracts. 

Commercial  usage  finally  is  another  factor  of  great  import- 
ance in  the  the  development  of  an  import  center.  In  olden  days 
when  spot  goods  trading  was  prevalent  in  the  import  trade,  the 
latter  was  more  or  less  dependent  upon  points  where  maritime 
traffic  was  concentrated.  The  development  of  long  range  busi- 
ness upon  the  basis  of  c.  i.  f.  contracts  has  enabled  manufac- 
turers and  producers  even  in  minor  points  to  enter  into  direct 
relation  with  oversea  exporters.  This,  of  course,  does  not  ap- 
ply to  all  oversea  products,  so  that  the  decentralization  process 
has  not  affected  all  oversea  products  in  the  same  measure.  The 
prevalence  of  auctions  in  certain  import  centers,  and  the  body 
of  commercial  usage  which  has  grown  up  in  connection  there- 
with, counteract  the  process  of  decentralization  and  the  devel- 
opment of  long  range  business,  making  it  difficult  to  wrest  the 
dominating  influence  of  the  import  receiving  and  distributing 
centers. 

The  political  factors  mentioned  as  affecting  the  develop- 
ment of  import  centers  include  the  possession  of  colonies,  pre- 
ferential treatment  of  colonies  in  customs  tariff  matters,  ship 
subsidies  for  traffic  with  colonies.  The  historic  examples  of 
such  political  factors  are  the  effects  of  Cromwell's  Navigation 
Act,  which  developed  the  English  ports,  of   Napoleon's  conti- 


148  INTEBNATIONAL  COMMERCE 

nental  blockade  which  served  to  develop  the  continental  import 
centers. 

In  modern  times  the  decentralization  process  in  the  import 
trade,  with  the  gradual  growth  of  long  range  business  between 
minor  points  inland  and  on  the  coast  with  overseas,  has  had  the 
effect  of  increasing  the  relative  importance  of  newer  and  minor 
trading  centers  at  the  expense  of  the  older  import  trading  cen- 
ters, although  the  volume  of  traffic  passing  through  the  latter 
may  even  increase  because  of  the  operations  of  the  former. 

An  example  of  an  import  trading  center  which  has  lost 
much  of  its  former  importance  is  London.  The  bulk  of  over- 
sea imports  in  Europe — outside  of  the  Dutch  trade  which 
always  gravitated  towards  Amsterdam  —  formerly  flowed  to 
London,  which  was  the  center  of  a  great  re-export  traffic.  In 
the  latter  part  of  the  nineteenth  century,  the  increase  of  the  long 
range  c.  i.  f.  business  boomed  other  European  ports,  Hamburg, 
Bremen,  Rotterdam,  Antwerp  and  Le  Havre.  American  busi- 
ness developed  Liverpool.  London  was  formerly  the  principal 
point  where  unsold  oversea  products  could  be  shipped  with  the 
assurance  of  finding  a  sale.  The  development  of  the  c.  i.  f.  busi- 
ness enabled  other  ports  to  emancipate  themselves  from  London 
as  the  center  of  re-export.  The  opening  of  the  Suez  Canal  de- 
veloped the  import  trade  of  Marseilles,  Genoa  and  Trieste.  The 
process  of  decentralization,  however,  also  favors  the  direct  trad- 
ing of  inland  manufacturers,  wholesalers  in  seaports  and  inland 
with  oversea  producing  territories.  This  tendency  of  emanci- 
pation from  middlemen  favors  the  oversea  exporter  who  is  in 
a  position  to  take  advantage  of  the  competition  for  his  products 
in  order  to  secure  better  prices.  The  activity  of  the  oversea 
exporter  must  therefore  gradually  shift  from  that  of  a  shipper 
who  leaves  the  sale  of  his  products  to  European  and  American  im- 
porters to  that  of  an  export  trader  seeking  to  study  and  exploit 
markets  in  which  his  products  are  saleable.  He  will  appoint 
agents  and  he  will  seek  to  adapt  himself  to  the  terms  of  con- 
tracts and  delivery  required  by  the  customers.  He  will  have  to 
accept  payments  other  than  through  London  banks,  reduce  the 
minimum  quantities  of  his  shipments,  make  better  assortments, 
ship  goods  more  corresponding  to  the  basis  on  which  they  were 
sold,  pack  his  goods  better.    Little  by  little  the  oversea  exporter 


IMPORT  OF  OVERSEA  PRODUCTS  14© 

may  to  a  considerable  extent  emancipate  himself  from  the  de- 
pendance  upon  the  importer  in  Europe  and  America  even  from 
the  point  of  view  of  financing,  through  utilizing  the  improve- 
ment in  the  bank  service  overseas  enabling  him  to  sell  c.  i.  f. 
to  his  customers.  The  auction  system  of  selling  oversea  pro- 
ducts will  lose  in  importance,  even  as  it  never  was  relatively  of 
equal  importance  in  the  United  States  as  compared  with  Europe, 
and  the  long  range  business  will  take  the  place  of  spot  sales  at 
the  port  of  destination. 

In  the  elimination  of  the  importers  in  the  strictest  sense  of 
the  word,  and  in  the  diverting  of  import  trading  preponderance 
from  the  old  import  receiving  and  distributing  centers  there 
are  certain  limitations.    These  are  due  to  several  factors : 

a)  The  great  seaports  and  import  trading  centers  attract 
importers  and  middlemen.  Import  commerce  feels  the  need  of 
warehousing  at  the  seaport  and  of  accepting  products  where  they 
are  landed  and  seeks  to  take  advantage  of  the  favorable  buying 
and  selling  opportunities  offered  by  a  great  import  trading 
center. 

b)  The  persistence  of  the  causes  which  lead  the  oversea  ex- 
porter to  ship  his  goods  in  an  unsold  condition  and  to  choose 
the  active  import  trading  center  as  the  destination :  the  financial 
dependence  of  the  exporter;  this  leads  him  to  send  goods  out 
on  consignment  and  to  accept  advances  thereon ;  the  dominating 
influence  of  auctions  and  exchanges  upon  the  market  price  of 
his  product;  technical  difficulties  preventing  a  long  range  busi- 
ness in  certain  oversea  products  and  from  certain  overseas  ter- 
ritories ;  the  establishment  in  oversea  exporting  centers  of 
European  and  American  exporters  shipping  goods  to  their  own 
branches  for  sale  as  spot  goods.  These  auctions  and  branches 
of  European  and  American  shippers  of  oversea  products  are 
almost  always  to  be  found  in  the  great  import  receiving  and 
trading  centers. 

c)  The  import  risk.  The  risk  of  importing  wiii  always  pro- 
vide for  the  existence  of  a  class  of  merchants  specializing  as 
importers  and  ready  to  assume  the  risk.  This  risk  of  importing 
is  borne  the  more  easily  the  wider  selling  opportunities  the  im- 
porter has.    He  will  therefore  gravitgte  to  a  large  import  trading 


150  INTEENATIONAL  COMMEECE 

center  with  widely  ramified  international  connections.  He  will 
be  in  that  respect  in  a  better  position  than  an  importer  located 
in  a  minor  place.  The  merchant  in  that  respect  will  be  in  a  bet- 
ter position  than  a  producer  requiring  oversea  products  for  own 
use.  In  some  lines  the  import  risk  is  so  great  that  neither  the 
producer  nor  an  ordinary  jobber  could  reasonably  assume  it.  This 
refers  particularly  to  products  of  high  intrinsic  value  and  mar- 
keted in  a  variety  of  qualities,  of  which  the  producers  and  the 
wholesalers  can  use  only  certain  quantities  in  certain  grades. 
An  example  of  this  is  raw  silk,  which  the  silk  manufacturer 
never  buys  direct  from  overseas,  or  tea,  which  a  jobber  handles 
for  certain  territories  requiring  distinct  qualities. 

d)  The  desire  to  receive  oversea  products  either  assorted  or 
after  certain  manipulations,  as  for  instance  coffee  assorted, 
washed,  colored,  etc.  Here  the  intervention  of  importers  is  es- 
sential, particularly  for  small  producers  and  jobbers  with  a  well 
defined  territory  and  special  trade  connections  or  without  re- 
quired installations  or  technical  knowledge  for  the  necessary 
manipulations. 

e)  The  need  of  credit  on  the  part  of  financially  weak  buyers 
and  the  secure  financial  standing  of  the  great  importing  houses. 
Oversea  exporters  will  seldom  be  in  a  position  to  meet  the  credit 
needs  of  smaller  buyers,  and  the  financial  strength  of  the  prom- 
inent importers  will  always  induce  oversea  exporters  to  prefer 
selling  them  at  lower  prices  than  selling  smaller  inland  buyers 
at  higher  prices. 

f)  The  size  of  minimum  quantities  which  the  oversea  ex* 
porter  is  willing  to  ship  to  an  individual  buyer  precludes  in  many 
instances  direct  purchases  by  smaller  buyers.  Smaller  require- 
ments must  be  covered  in  Europe  or  America  and  cannot  be 
covered  by  direct  purchases  overseas. 

g)  Producers  and  wholesalers  cannot  wait  long  for  over- 
sea shipments,  and  they  are  forced  to  buy  indirect  through  im- 
porters. 

h)  European  and  American  importers  are  able  to  compete 
successfully  with  oversea  exporters  in  sales  in  Europe  and 
America.  This  refers  both  to  price  and  to  quality.  They  buy 
on  speculation,  for  future  shipment,  and  frequently  can  under- 


1MP0BT  OF  OVERSEA  PRODUCTS  151 

sell  the  oversea  exporter.  Frequently,  for  instance,  Brazilian 
coffee  may  be  bought  more  cheaply  in  Le  Havre  than  in  Brazil. 
By  buying  up  the  entire  production  in  certain  territories  the  im- 
porters can  offer  the  trade  qualities  and  brands  that  appeal  to 
it.  Towards  the  end  of  the  exporting  season  in  certain  classes 
of  oversea  commodities  the  better  qualities  can  be  procured  only 
in  Europe  and  in  America. 


CHAPTER  IX. 

The  Organization  of  Public  Sales. 

i.    Markets  and  Fairs. 

A  market,  as  a  place  of  sale,  is  the  place  in  which  at  stated 
times  buyers  and  sellers  publicly  aggregate  in  order  to  buy  and 
sell  goods  by  private  bargaining;  the  goods  may  be  either 
brought  to  the  market,  changing  hands  on  the  conclusion  of  the 
transaction,  or  may  be  sold  for  future  delivery  on  the  basis  of 
samples  shown. 

An  extension  of  the  meaning  of  the  word  "market"  has  be- 
come current  largely  through  the  activities  of  stock  and  produce 
exchanges,  and  is  understood  to  comprehend  the  existing  demand 
and  supply  in  a  given  commodity  in  a  given  territory.  Thus  we 
speak  of  the  coffee  market,  of  the  sugar  market,  of  the  market 
in  foreign  exchange,  and  the  market  may  be  termed  dull,  active, 
calm,  irregular,  etc. 

In  the  Middle  Ages,  and  even  during  many  periods  of  mod- 
ern times,  the  market  as  a  place  of  sale  was  the  scene  of  import- 
ant transactions  in  international  commerce. 

Since  one  of  the  characteristics  of  the  original  meaning  of 
the  word  "market"  was  the  sale  of  spot  goods  brought  to  the 
market  place,  the  importance  of  the  market  as  a  public  sales  in- 
stitution prevailed  as  long  as  the  trading  in  international  com- 
merce was  largely  done  in  spot  goods.  Inadequate  transporta- 
tion facilities  made  the  development  of  long  range  business  in 
those  days  very  difficult.  The  opportunities  for  exchanging  com- 
munications in  time  to  conclude  sales  contracts  were  too  limited. 
The  possibility  of  effecting  shipments  through  third  parties  with 
a  rational  degree  of  security  did  not  yet  exist.  The  foreign 
trader  was  his  own  shipper.  He  accompanied  the  goods  as  seller 
to  the  place  of  sale,  he  took  them  along  in  his  capacity  as 
buyer. 

The  juridical  relations  between  traders  located  in  two  dif- 
ferent countries  were  too  insecure  and  undefined ;    the  traders' 


MARKETS  168 

credit  responsibility  had  not  yet  assumed  a  high  degree  of  de- 
velopment; the  difficulties  of  ascertaining  the  credit  standing  of 
a  trader  in  international  relations  had  not  yet  been  solved;  the 
capitalization  of  traders  was  too  insufficient. 

The  other  characteristic  of  the  market,  the  element  of  pub- 
licity, was  an  important  one  in  olden  days.  The  traders  were 
bound  to  employ  brokers,  sworn  measurers,  weighers,  carriers, 
etc.  The  sales  were  effected  in  certain  publicly  accessible  local- 
ities, streets,  squares,  etc.,  during  well  defined  hours  and  on  stated 
days. 

The  sales,  however,  were  made  by  private  bargaining.  The 
development  of  public  auction  sales  of  foreign  produce  on  a  large 
scale  is  of  comparatively  late  origin  and  had  its  birth  in  the 
large  seaports.  The  commerce  of  the  Middle  Ages  was  very 
largely  a  market  commerce. 

In  the  seaports,  however,  the  arrival  of  a  cargo  was  the 
occasion  a  display  of  selling  activity,  but  since  no  stated  time 
could  be  arranged  for  this  class  of  business,  the  development  of 
market  trading  did  not  coincide  with  seaport  trade.  When  not 
sold  at  auction,  goods  arriving  in  the  seaports  were  transported 
to  the  interior  markets  for  sale  there. 

The  holding  of  markets  offered  certain  safeguards  and  a  cer- 
tain freedom  of  commercial  activity  in  interlocal  and  interna- 
tional trading.  Traders  proceeding  to  and  from  markets  were 
given  certain  assurances  of  freedom  from  molestation ;  their  per- 
sons and  goods  were  exempt  from  arrest  excepting  for  debts 
contracted  during  the  market  season  and  in  the  market  place. 
Local  and  frontier  taxes  were  suspended,  while  their  place  was 
taken  by  market  or  fair  dues,  and  the  local  guild  privileges  were 
extended  also  to  the  visiting  traders. 

The  occasion  of  a  market  formed  in  those  days  the  only 
opportunity  of  trading  in  commodities  on  a  large  scale.  The 
costs  and  perils  of  a  journey  with  merchandise  could  be  borne 
only  upon  the  assurance  that  the  trader  could  dispose  of  a  large 
stock  of  goods.  And  similarly  only  in  a  public  market  or  fair 
had  the  buyer  an  assurance  of  covering  his  demand  for  a  large 
quantity  of  goods.  The  periodic  influx  of  traders  in  the  market 
place  furnished  such  an  assurance  for  both  classes. 


154  INTERNATIONAL  COMMERCE 

Similarly  the  periodic  market  formed  the  only  means  of 
establishing  current  prices  for  commodities,  since  an  interlocal 
and  international  exchange  of  information  was  yet  lacking,  and 
the  inadequate  traveling  facilities  prevented  a  comprehensive 
survey  of  the  demand  and  the  supply. 

Certain  important  commercial  communities  like  Venice, 
Bruges,  Lubeck  were  permanent  market  places  where  a  large 
exchange  of  merchandise  took  place  throughout  the  year. 

The  development  of  safe  transportation,  the  increase  of 
trading  privileges,  the  slowly  rising  density  of  population,  the 
growth  of  a  numerous  and  responsible  trading  community,  the 
regulation  of  the  communication  service  with  the  modest  means 
of  the  mail  coach  little  by  little  increased  the  opportunity  of 
interlocal  trading,  but  it  still  had  for  its  object  the  dealing  in 
spot  goods.  The  markets  lost  their  relative  importance,  but  their 
absolute  importance,  due  to  the  general  increase  of  the  demand 
and  of  traffic,  rose  to  even  a  higher  level  in  the  nineteenth  cen- 
tury. 

The  railway  and  the  steamship  finally  undermined  the  com- 
mercial importance  of  special  periodic  markets.  The  improved 
means  of  transportation  transformed  the  world  into  one  large 
market  place.  The  introduction  of  the  telegraph  permitting  the 
publication  of  production  and  commercial  reports,  the  broadcast 
mailing  of  price  lists  and  offers  as  well  as  of  samples,  tht  send- 
ing of  salesmen  and  agents  who  could  be  in  constant  and  in- 
stant touch  with  their  principals,  though  traveling  in  distant 
countries,  made  it  possible  to  survey  the  demand  and  the  supply 
throughout  the  world  without  the  personal  contact  of  tracers  in 
a  market  place.  The  telegraph  and  the  cable,  the  railway  and 
the  steamship  facilitated  the  prompt  exchange  of  views  be  tween 
contracting  parties  separated  by  wide  distances  and  permitted 
the  conclusion  of  long  range  business.  The  improved  means  of 
transportation  and  communication  resulted  in  a  division  of  labor 
and  in  the  creation  of  media  which  permitted  the  seller  to  leave 
the  transportation  of  his  goods  to  third  parties  without  great  risk, 
enabling  him  to  ship  merchandise  to  his  buyer  through  the 
quickest  and  cheapest  medium  available.  The  concentration  of 
foreign  goods  in  a  market  place  where  out  of  town  or  foreign 


JTAIBS  155 

buyers  congregate  added  too  much  to  the  ultimate  cost  of  goods, 
and  the  modern  system  of  close  price  figuring  could  not  tolerate 
this  added  transportation  cost. 

In  modern  times  the  line  of  demarcation  between  markets 
and  fairs  has  been  rather  indistinct.  Both  take  place  period- 
ically after  a  lapse  of  considerable  time.  Both,  with  the  excep- 
tion of  a  few  special  institutions,  admit  the  widest  range  of 
goods,  being  general  markets  and  fairs.  The  fairs,  however,  as 
a  rule  cater  to  the  wholesale  trade  and  include  very  largely  raw 
products,  whereas  in  annual  markets  the  retail  traders  in  manu- 
factured products  predominate  as  buyers.  The  fairs  still  persist 
where  the  retail  traders  have  not  developed  into  a  commercially 
strong  class,  but  elsewhere  they  are  survivals  of  an  antiquated 
system  and  are  fast  losing  importance,  certainly  from  the  inter- 
national point  of  view. 

Of  the  fairs  only  a  few  have  retained  their  importance. 
Among  these  the  most  prominent  are  the  Leipsic  Fair  and  the 
Nizhni-Novgorod  Fair.  The  importance  of  the  Leipsic  Fair  per- 
sists still  in  those  lines  where  the  personal  selection  of  individual 
pieces  is  desirable,  as  in  furs,  hides  and  skins,  certain  textiles, 
etc.  But  a  modernized  form  of  fair  trading  has  developed  in 
other  lines,  particularly  where  at  certain  seasons  of  the  year  it 
is  necessary  to  create  new  ranges  of  samples  which  it  is  de- 
sirable to  bring  quickly  before  wide  strata  of  buyers.  Among 
these  goods  are  ceramics,  glassware,  metal  wares,  musical  in- 
struments, paper  goods,  toys,  etc.  But  instead  of  bringing  the 
actual  merchandise  to  the  fair,  the  custom  is  now  to  exhibit 
samples,  which  is  done  in  Leipsic  and  in  Lyons,  and  the  business 
is  concluded  for  future  shipment  on  the  basis  of  selected  samples, 
the  buyers  sometime  reserving- a  special  style  for  their  own  ex- 
clusive use. 

The  three  sample  fairs  which  are  held  annually  in  France 
are  the  Lyons  Fair,  held  in  March  and  lasting  generally  two 
weeks,  the  Paris  Fair,  held  in  April  and  May  and  likewise  last- 
ing about  a  fortnight,  and  finally  the  Bordeaux  Fair  held  during 
the  first  two  weeks  in  June. 

The  Lyons  Fair  is  international  in  character  and  has  the 
candid  aim  of  replacing  the  Leipsic  Fair.     The  Paris  Fair  is  a 


166  INTERNATIONAL  COMMERCE 

national  sample  fair,  and  the  Bordeaux  Fair  is  a  colonial  fair. 
An  effort  has  been  made  to  attract  American  exhibitors  to  the 
Bordeaux  Fair.  A  number  of  American  firms  have  exhibited  at 
Lyons.  Exhibits  are  admitted  into  France  on  the  basis  of  bonded 
custom  entry  and  must  be  re-exported  within  six  months.  Rail- 
ways have  provided  certain  concessions  for  the  free  return  of 
exhibits  from  the  fair  to  the  port  of  return  shipment.  Bordeaux 
is  an  important  center  for  the  trade  between  France  and  her 
colonies,  as  fully  one  third  purchases  made  in  France  for  the 
colonies  are  handled  by  Bordeaux  firms,  and  a  similar  propor- 
tion of  exports  from  the  French  colonies  to  France  is  shipped  to 
Bordeaux  firms. 

An  important  fair  is  held  annually  in  Irbit,  in  Siberia,  where 
traders  from  European  and  Asiatic  Russia,  Caucasus,  Central 
Asia,  Persia,  and  from  many  foreign  countries  are  wont  to  con- 
gregate. Other  modern  markets  are  found  in  the  Near  East  and 
India,  connected  with  the  influx  of  pilgrims  to  religious  festi- 
vities, and  in  the  interior  of  Africa  where  there  are  still  many 
economic  reasons  for  their  existence.  Native  traders  are  promi- 
nent in  the  markets  of  the  Orient  and  of  Africa.  In  some  of 
them — as  in  Mecca  and  Medina — native  traders  operate  to  the 
exclusion  of  foreigners. 

The  development  of  market  trading  has  led  to  the  creation 
of  varieties  of  markets  of  local  importance  only,  such  as  weekly 
and  daily  local  markets,  trading  in  municipal  market  halls,  spe- 
cial markets,  etc.  A  few  of  the  special  markets  are  of  inter- 
national importance,  being  visited  by  foreign  buyers  or  patron- 
ized by  foreign  sellers. 

2.    Auctions. 

Auctions,  sometimes  called  public  sales,  are  sales  of  mer- 
chandise to  highest  bidders  in  stated  localities  at  stated  times, 
by  public  invitation.  The  merchandise  sold  is  generally  fully 
or  partly  open  for  inspection  at  the  place  of  sale.  The  word 
"auction,"  coming  from  the  Latin  word  meaning  to  augment,  is 
based  upon  the  practice  of  each  successive  bid  being  an  increase 
over  the  preceding  bid. 


AUCTIONS  167 

There  are  varieties  of  auctions.  Some  take  place  by  decree 
of  courts  and  tribunals,  others  independent  thereof.  There  are 
voluntary  and  compulsory  auctions,  auctions  in  marketable  or 
unmarketable  commodities,  the  instances  of  the  latter  being 
damaged  shipments  which  cannot  be  regularly  marketed,  and  for 
which  the  auction  must  create  a  temporary  artificial  market. 
Finally  there  are  wholesale  and  retail,  and  there  are  regular 
and  occasional  auctions. 

Regular  auctions  are  such  as  are  chosen  by  owners  of  the 
goods  as  a  regular  selling  medium  for  specific  merchandise,  tak- 
ing place  once  a  year,  or  once  a  month  or  once  a  week,  or  daily 
throughout  the  year,  or  whenever  a  sufficient  quantity  of  mer- 
chandise accumulates.  Occasional  auctions  are  such  as  are  neces- 
sitated by  unforeseen  irregular  occurrences,  which  usually  place 
the  seller  into  a  disagreeable  situation,  with  the  auction  as  a 
remedy.  Such  auctions  may  be  concentrated  in  certain  local- 
ities and  held  there  regularly  or  at  stated  periods,  but  in  each 
instance  the  source  of  the  merchandise  will  be  accidental. 

In  international  commerce  the  important  auctions  are  those 
which  take  place  otherwise  than  through  decrees  of  courts,  vol- 
untarily, on  a  large  scale,  with  the  wholesale  trade  as  customers, 
and  principally  in  marketable  merchandise. 

The  origin  of  auctions  of  oversea  products  on  a  large  scale 
is  to  be  sought  in  Holland.  The  Dutch  East  Indies  Company  is 
believed  to  have  initiated  this  selling  method.  Other  merchant 
companies  in  Holland  and  in  the  United  Kingdom  imitated  the 
system.  When  the  cargo  ships  of  these  companies  arrived,  it 
was  the  custom  of  offering  the  merchandise  in  lots  to  the  highest 
bidder.  These  companies  by  virtue  of  dominating  the  trade  in 
the  producing  territory  had  a  sort  of  a  monopoly  on  certain 
products  and  ran  no  risk  of  their  customers  availing  themselves 
of  opportunities  to  fill  their  demands  elsewhere.  The  supply 
of  the  imported  products  was  always  limited,  prices  were  high, 
the  c.  i.  f.  business  had  not  yet  developed,  so  that  it  was  im- 
possible to  cover  the  demand  before  the  arrival  of  the  goods. 
The  auction  sale  was  based  on  the  delivery  of  spot  goods  and 
could  have  attained  development  only  before  the  development  of 
the  c.  i.  f.  business.  It  is  nowadays  of  importance  only  in  those 
countries  where  it  had  developed  before  the  days  of  modern 


158  INTERNATIONAL  COMMERCE 

commercial  practice.  It  persists  by  a  law  of  inertia  and  the 
establishment  of  commercial  usage,  and  to  some  extent  as  the 
result  of  the  organization  of  international  commerce  which 
places  oversea  shippers  into  financial  dependance  upon  import- 
ers in  industrial  counries,  and  in  some  articles  as  the  result  of 
the  difficulty  of  selling  them  at  long  range. 

London  and  Amsterdam  are  the  chief  places  for  selling  over- 
sea products  by  means  of  auctions.  In  London  the  auction  is 
the  medium  for  the  sale  of  wool,  skins,  tallow,  tea,  coffee,  spices, 
fruits,  hardwoods,  ivory,  indigo,  and  many  colonial  products; 
in  Amsterdam  cocoa,  coffee,  tin,  coal,  indigo,  etc.  Many  of  these 
products  are  sold  exclusively  by  auction  on  their  first  importa- 
tion, and  are  only  later  sold  wholesale  and  retail  in  the  regular 
course  of  trade.  From  London  and  Amsterdam  the  auction 
method  has  spread  to  Liverpool  and  Rotterdam,  fruits,  rubber 
and  hardwoods  being  sold  at  auction  in  Liverpool,  coffee  and  tin 
in  Rotterdam.  Outside  of  Holland  and  the  United  Kingdom  the 
auction  method  in  the  sale  of  oversea  products  has  not  greatly 
developed,  excepting  the  hardwoods  auctions  in  Le  Havre  and 
the  wool  auction  and  the  ivory  auction  in  Antwerp,  the  latter 
chiefly  because  of  the  choice  of  that  method  by  the  Congo  gov- 
ernment. 

Occasionally  auctions  of  oversea  products  are  held  over- 
seas. This  is  the  practice  mostly  in  British  and  Dutch  colonies. 
Thus  auctions  are  held  in  Dutch  East  Indies  for  the  sale  of 
coffee,  tin,  indigo,  wool  auctions  in  Australia  and  South  Africa, 
indigo  auctions  and  tea  auctions  in  Calcutta,  tea  auctions  in 
Colombo. 

Other  products  that  are  frequently  sold  at  auctions  are 
fisheries  products,  woods,  wines,  fruits,  etc.  Manufactured 
goods  are  not  as  a  rule  sold  in  regular  auctions,  excepting  cheap 
cottons  in  Shanghai,  where  the  importers  dispose  of  them  regu- 
larly at  auction. 

Manufactured  goods,  however,  are  frequently  sold  at  oc- 
casional auctions.  This  is  principally  the  case  in  shipments  from 
Europe  and  America  to  oversea  countries,  when  the  shipment 
is  damaged  in  transit,  or  in  the  case  of  unlucky  consignments, 
or  in  order  to  introduce  a  new  brand  of  goods.     In  some  over- 


auctions  Leg 

sea  importing  points  such  auctions  are  so  frequent  that  they  arc 
held  on  stated  days  each  week. 

The  auctions  of  oversea  products  are  generally  carried  on 
by  brokers  acting  as  auctioneers,  and  less  rarely  by  the  owner 
or  the  selling  commissioner.  In  the  latter  case  it  is  generally  a 
trading  company  which  has  equipped  itself  for  auctioning  of 
oversea  products,  as  the  Nederlandsche  Handels  Maatschappij 
or  the  Hudson  Bay  Company  in  London.  Official  persons,  such 
as  the  huissier  in  Belgium,  may  be  present  at  the  auction  in  order 
to  see  that  the  transactions  are  carried  out  in  conformance  with 
the  existing  legal  regulations,  thus  assuring  the  rights  particular- 
ly of  the  principal  who  may  be  located  abroad.  In  England, 
in  addition  to  the  license  which  the  auctioning  broker  must  take 
out,  the  commercial  prestige  of  the  broker  is  relied  upon  to  in- 
sure the  observance  of  the  interests  of  all  parties  concerned, 
and  the  auction  system  is  not  otherwise  regulated. 

The  time  of  the  auctions  is  generally  published  in  advance  in 
the  newspapers,  the  lists  of  goods  to  be  auctioned  are  circulated 
among  interested  parties.  The  wholesale  trade  is  regularly  in 
receipt  of  these  lists.  The  lists  are  made  up  by  the  auctioning 
broker.  In  addition  to  a  full  description  of  the  goods,  these  lists 
contain  the  sales  conditions  to  which  all  contracting  parties  must 
submit.  The  description  of  the  goods  contains  an  enumeration 
of  lots  by  quantities,  qualities,  weights  and  measurements,  in- 
dicating the  origin  of  the  goods  and  the  name  of  the  ship  on 
which  they  arrived. 

Other  conditions  may  refer  to  the  determination  of  weights 
and  measurements,  the  drawing  of  standard  samples,  the  pricing, 
the  minimum  successive  bid  increase,  the  terms  of  payment,  the 
buyer's  obligation  to  accept  the  goods,  the  rights  of  the  seller 
in  the  case  of  the  delay  or  the  failure  on  the  part  of  the  buyer 
to  accept  the  goods,  the  right  of  the  seller  to  reject  bids,  or  to 
demand  guarantees  from  the  buyer,  the  fixing  of  the  auction 
fees,  the  manner  of  their  payment,  regulations  for  the  adjustment 
of  disputes,  etc. 

The  individual  lots  are  described  by  indicating  their  marks, 
their  warehouse  numbers,  quantity  and  quality  data  of  various 
sorts,  auctioneer's  fees  for  various  lots,  and  adjustment  rates 
for  defects  or  shortages.    The  auction  lists  generally  specifically 


160  INTERNATIONAL  COMMERCE 

reject  a  guarantee  for  the  correct  description  of  the  goods  auc- 
tioned. 

The  division  into  lots  is  effected  in  order  to  facilitate  the 
disposal  of  the  entire  quantity  of  goods  sold.  It  is  the  rule  to 
put  together  into  single  lots  uniform  qualities  and  to  arrange 
quantities  so  as  to  put  them  within  the  range  of  even  smaller 
buyers. 

Before  the  auction  the  goods  are  generally  exhibited,  or  the 
prospective  buyers  are  afforded  an  opportunity  of  inspecting 
them  in  the  warehouse.  Where  this  is  not  practicable,  samples, 
in  the  case  of  furs  and  skins  random  sample  bundles,  are  ex- 
hibited either  in  the  auction  premises  or  the  brokers'  salesrooms, 
ox  in  some  lines,  as  fruit,  the  packages  are  opened  in  the  auction 
premises  and  samples  are  distributed  among  the  bidders.  The 
auctioning  broker  as  a  rule  declines  to  guarantee  the  correspond- 
ence of  samples  with  lots.  Since  opportunity  is  given  the  pro- 
spective buyer  to  examine  the  goods,  as  a  rule  the  buyer's  right 
to  make  claims  with  regard  to  quality  is  limited,  and  in  any  event 
it  expires  a  few  days  after  the  acceptance  of  the  goods. 

A  buying  broker  is  generally  employed  to  make  bids.  The 
buyer  usually  has  a  pre-arranged  code  with  his  broker  which 
serves  to  protect  his  buying  tendencies  from  coming  to  the  knowl- 
edge of  competing  bidders.  Certain  auctions,  such  as  wool  auc- 
tions, make  the  employment  of  buying  brokers  obligatory. 
Orders  to  buy  in  behalf  of  absent  bidders  may  be  carried  out  by 
commissioners.  In  the  latter  case  they  must  furnish  the  bond  of 
a  local  firm.  Strangers  bidding  at  auctions  must  employ  not  only 
a  broker  but  also  a  local  commission  man  as  a  bondsman.  Most 
conditions  of  sale  in  auctions  insist  upon  the  use  of  a  local  firm 
as  middlemen,  either  by  granting  the  seller  the  right  to  reject 
the  bid  of  a  buyer  who  is  unknown  to  him,  or  to  demand  his 
depositing  immediately  the  full  purchase  price,  or  part  of  the 
purchase  price  as  a  security,  or  furnishing  the  guarantee  of  a 
responsible  local  firm.  In  fact  the  specific  local  usages  in  bid- 
ding would  make  it  difficult  for  a  stranger  to  bid  without  the 
services  of  a  local  middleman.  The  sale  is  generally  made  to 
the  highest  bidder.  In  case  there  is  more  than  one  highest  bid- 
der, and  a  further  increase  is  unobtainable,  they  draw  lots.     It 


AUCTIONS  161 

is  occasionally  stipulated  that  the  highest  bid  must  at  least  equal 
a  stated  minimum  price.  After  the  auction  the  buying  broker 
furnishes  his  principal  with  a  sales  memorandum  indicating  the 
salient  points  of  the  transaction. 

The  delivery  is  generally  effected  ex-warehouse,  through  the 
acceptance  of  warehouse  warrants  or  through  delivery  orders, 
This  is  generally  done  against  payment.  As  a  rule  the  buyer 
deposits  20  to  25%  of  the  sales  price  immediately  after  the  auc- 
tion, receiving  for  it  a  weight  memorandum  that  goes  with  the 
warrant.  In  some  instances,  particularly  in  Holland,  the  buyer 
receives  credit,  which  is  seldom  more  than  90  days.  The  accept- 
ance of  the  goods  must  be  effected  within  a  specified  time,  and 
until  the  expiration  of  that  time  warehouse  expenses  are  charge- 
able to  the  seller.  The  risk  of  warehousing,  however,  is  assumed 
by  the  buyer  immediately  after  the  sale,  excepting  that  it  is  gen- 
erally stipulated  that  in  the  case  of  the  total  destruction  of  the 
merchandise  sold  through  fire  the  contract  is  cancelled. 

Very  strict  stipulations  are  provided  for  the  case  that  the 
buyer  proves  unable  to  meet  his  obligations.  The  seller  has  the!1, 
as  a  rule  the  right,  after  notifying  the  buyer,  to  cancel  the  con- 
tract, to  sell  the  goods  either  privately  or  again  by  auction,  hold- 
ing the  original  buyer  responsible  for  a  minimum  price,  and  for 
the  expenses  of  the  new  sale  and  loss  of  interest,  while  any  ac- 
crued extra  proceeds  go  to  the  seller. 

The  principal  auction  fee,  or  brokerage,  is  borne  by  the 
seller.  Legal  regulations  or  the  usage  of  organized  commerce 
determine  its  extent.  The  brokerage  is  generally  graduated  in 
accordance  with  the  volume  of  sales  and  with  the  value  of  the 
auctioned  goods.  Sometimes  the  auctioneer  assumes  ihe  entire 
cost  of  the  auction.    Certain  taxes  are  paid  by  the  buyer. 

After  the  auction  the  auctioneers  publish  the  results  at- 
tained, by  issuing  a  statement,  and  it  is  generally  customary  to 
publish  reports  of  auctions  in  special  publications  known  as 
Market  Reports  or  Trade  Records. 

Some  organizations  have  official  auction  rooms  with  sample 
rooms  and  warehouses,  as  the  Wool  Exchange  in  London,  or  the 
Nederlandsche  Handels  Maatschappij  in  Rotterdam.  Some  auc- 
tioneers have  their  own  auction  rooms. 


162  INTERNATIONAL  COMMERCE 

The  advantages  and  disadvantages  of  auctions.  Auctions,  as  a 
selling  medium,  offer  the  vendor  a  number  of  important  advan- 
tages. The  auction  method  provides  a  concentration  of  the  demand 
and  an  easy  sales  medium,  facilitates  a  large  turnover  within  a 
brief  space  of  time,  stimulates  the  buyers  to  increased  competi- 
tive bids  and  thus  enables  the  vendor  to  attain  better  prices,  and 
the  sales  conditions  protect  the  interests  of  the  vendor.  Par- 
ticularly concerns  having  little  experience  in  local  usage  or 
routine  or  technical  knowledge  of  the  goods,  or  banks  which  re- 
ceive goods  on  consignment,  through  the  employment  of  expert 
brokers  to  conduct  auctions  are  able  to  sell  merchandise  to  best 
advantage. 

The  principal  disadvantage  of  auctions  from  the  vendor's 
point  of  view  is  the  pressure  that  may  be  exercised  upon  the 
sales  price  through  accidentally  poorly  frequented  auctions,  or 
through  the  ease  with  which  an  unfavorable  market  situ- 
ation, as  illustrated  by  the  lack  of  eagerness  on  the  part  of  visit- 
ing buyers,  may  be  taken  advantage  of  to  lower  the  sales  price. 
This  may  take  the  form  of  a  panicky  drop  of  the  market  price. 
It  is  seldom  possible  or  practicable  to  withdraw  the  goods  from 
the  sale  in  the  face  of  such  an  emergency.  Particularly  in  China 
and  Japan  have  the  native  traders  made  a  practice  of  shrewdly 
utilizing  the  disadvantageous  position  of  the  seller  in  the  case  of 
the  forced  sale  of  merchandise  at  auction.  The  danger  of  a 
poorly  frequented  auction  is  increased  in  places  where  a  large 
c.i.f.  business  in  the  merchandise  concerned  has  developed.  The 
dividing  of  the  merchandise  into  lots  according  to  quality  some- 
times leads  to  unfavorable  sales  of  the  poorer  lots. 

From  the  point  of  view  of  the  buyer  the  advantages  are  the 
following:  the  auction  furnishes  him  a  good  insight  into  the 
market  situation,  enabling  him  to  shape  his  bids  accordingly. 
He  can  purchase  smaller  quantities  of  the  goods  desired  by  him 
at  a  relatively  low  price.  He  can  get  oversea  products  at  first 
hand,  or  from  the  immediate  commission  agent  of  the  original 
shipper,  with  little  risk,  since  the  goods  are  on  the  spot,  f  requen- 
ly  all  assorted,  open  to  inspection.  This  is  particularly  the  case 
in  auctions  and  commodities  where  at  stated  times  the  merchan- 
dise is  marketed  authoritatively  for  international  commerce,  be- 
ing meanwhile  warehoused  in  unsold  uncondition.    The  buyer  is 


DUTCH  AUCTIONS  163 

then  in  a  position  to  pick  his  goods  from  the  world  market  stuck, 
and  the  auction  prices  are  not  only  momentarily  of  importance 
but  form,  with  minor  fluctuations,  the  basis  of  the  bulk  of  trans- 
actions for  the  commodity  concerned  until  the  next  auction. 

As  against  these  advantages,  we  may  note  the  following  dis- 
advantages from  the  point  of  view  of  the  buyer:  One  of  these 
is  the  possibility  of  too  high  a  price  through  too  eager  com- 
petitive bidding  or  secret  machinations  of  the  seller.  This  may 
be  counterbalanced  by  the  buyer's  good  judgment  and  coolness 
in  bidding.  Generally  the  seller  in  a  well  frequented  auction  is 
at  an  advantage  with  regard  to  the  buyer.  This  is  seen  in  his 
ability  to  impose  strict  sales  conditions.  The  buyer  must  also 
remember  that  he  pays  an  appreciable  extra  for  the  fact  of  ob- 
taining spot  goods.  It  is  true  that  he  buys  practically  at  first 
hand,  but  so  many  brokerage  fees  and  expenses  and  warehous- 
ing charges  accumulate  in  the  auction  business,  particularly  as 
the  seller's  very  reason  for  selling  at  auction  is  the  desire  to  ob- 
tain a  higher  sales  price,  that  he  would  frequently  find  it  cheaper 
to  cover  his  needs  through  the  riskier  medium  of  c.  i.  f.  busi- 
ness. 

Price  increases  within  an  individual  auction,  or  within  a 
series  of  auctions  either  held  in  quick  succession  or  periodically 
at  intervals,  may  be  also  erratic  or  unjustified,  placing  this  busi- 
ness upon  a  somewhat  speculative  basis. 

The  practice  of  auction  sales  of  international  importance  in 
certain  merchandise  in  certain  import  centers  has  been  a  power- 
ful stimulus  to  the  growth  of  these  import  centers  as  factors  in 
international  commerce. 

3.    Dutch  Auctions. 

Dutch  auctions  as  a  medium  of  the  sale  of  oversea  products 
are  a  development  due  to  certain  regular  auctions  of  Sumatra 
tobacco  held  in  Holland  in  the  latter  part  of  the  nineteenth  cen- 
tury which  turned  out  disastrously  to  the  sellers.  The  unfortun- 
ate results  of  these  auctions  led  the  Dutch  East  Indian  tobacco 
growers  to  drop  the  auction  medium  for  a  time  and  later  to 
adopt  a  modified  auction  system  known  as  Dutch  auctions.  This 
is  the  auction  form  in  which  the  seller  indicates  a  price  which 

... 


164  INTERNATIONAL  COMMERCE 

he  desires  to  secure,  invites  counter  bids,  and  keeps  lowering  his 
own  price  until  a  bidder  is  found,  or  until  he  can  lower  it  no 
more.  Thus  is  Sumatra  tobacco  sold  in  Amsterdam,  as  well  as 
Java  coffee,  skins,  etc.  Rubber  is  similarly  sold  in  Antwerp. 
The  output  of  many  oversea  mining  and  plantation  enterprises 
is  similarly  offered.  The  seller  having  indicated  the  price  he 
desires  to  secure,  and  publicly  offered  his  goods  for  sale  invites 
counter-offers  from  buyers.  The  difference  between  this  form 
of  Dutch  auctions  and  regular  auctions  lies  in  the  fact  that  pro- 
spective purchasers  do  not  come  together  and  the  offers  are  re- 
ceived in  writing,  so  that  no  buyer  knows  his  competitor's  offers 
and  it  is  impossible  for  him  to  gradually  adjust  his  bids  to  the 
existing  competition.  There  is  no  public  control  of  the  ad- 
judication of  the  sale,  nor  is  the  seller  bound  to  accept  the 
highest  bid,  excepting  in  the  case  of  tobacco  auctions  in  Holland 
which  provide  that  the  bids  be  opened  in  the  presence  of  a  notary 
and  the  highest  bid  be  accepted.  And  the  seller  frequently  ap- 
portions the  merchandise  sold  among  several  bidders,  while  in  the 
Antwerp  auction  sales  of  rubber  it  is  the  practice  to  invite  some 
of  the  highest  bidders  to  a  personal  meeting  in  order  to  induce 
them  to  outbid  one  another.  In  the  case  of  Dutch  auctions  it 
is  the  practice  not  to  offer  the  merchandise  by  assorted  lots,  but 
to  sell  entire  shiploads. 

Otherwise  Dutch  auctions  differ  little  from  regular  auctions. 
They  are  carried  on  by  means  of  a  printed  list  indicating  the 
name  of  the  seller,  containing  a  description  of  the  merchandise 
and  detailed  sales  conditions  patterned  after  the  sales  conditions 
of  regular  auctions.  Either  the  owner  of  the  merchandise  or  a 
broker  distributes  the  lists.  The  services  of  brokers  are  em- 
ployed to  appraise  the  goods  or  to  draw  offers  from  prospective 
buyers.  Brokers  are  then  provided  with  samples  which  they 
submit  to  buyers  whose  bids  are  invited.  The  merchandise  is 
accessible  to  inspection,  usually  in  the  sample  room  of  an  auc- 
tion establishment.  The  bids  are  delivered  sealed.  The  buyer 
submits  his  bids  through  a  broker.  At  the  expiration  of  a  stated 
period  the  seller  opens  the  sealed  bids.  The  results  are  published 
even  as  the  results  of  the  regular  auctions. 

The  advantages  and  disadvantages  of  Dutch  auctions.  From 
the  point  of  view  of  the  seller,  Dutch  auctions  have  the  ad- 


COMPETITIVE  TEXDEKS  165 

vantage  that  the  accidental  poor  attendance,  such  as  may  occur 
in  a  regular  auction,  cannot  exert  the  same  depressing  effect 
upon  the  sales  price.  Whether  there  be  many  or  few  bidders, 
the  individual  bidder  at  a  Dutch  auction  is  not  influenced 
by  the  bids  of  his  competitors  in  making  his  bid,  unless  the  pro- 
spective buyers  get  together  and  make  common  cause.  The 
seller,  however,  not  being  bound  to  accept  any  bid,  may  protect 
himself  by  ignoring  the  results  of  the  auction,  which  eventuality 
does  not  affect  the  market  price  in  the  same  measure  as  an  un- 
fortunate auction  . 

The  favorable  effect  of  the  eager  buyers  outbidding  one 
another  in  a  regular  auction  is  lacking  in  the  Dutch  auction.  But 
another  factor  may  lead  to  higher  prices,  and  that  is  the  un- 
certainty of  the  individual  bidders  as  to  the  bids  of  their  com- 
petitors. And  this  is  at  the  same  time  the  great  disadvantage 
of  the  Dutch  auctions  from  the  point  of  view  of  the  buyer.  He 
cannot  commence  with  a  small  bid  and  gradually  increase  it.  He 
is  groping  in  the  dark.  If  he  is  anxious  to  secure  the  merchan- 
dise he  must  make  the  highest  bid  possible,  and  even  then  he 
lacks  the  assurance  of  securing  it. 

Another  advantage  from  the  point  of  view  of  the  seller  is 
that  he  does  not  divide  the  merchandise  into  lots  with  the  risk 
of  having  poorer  lots  remain  on  his  hands,  or  of  being  forced 
to  dispose  of  them  at  a  loss.  Only  very  large  buyers,  as  a  rule, 
participate  in  Dutch  auctions.  And  herein  lies  an  advantage  for 
the  buyer,  and  an  advantage  for  the  great  importers.  Manu- 
facturers and  domestic  wholesalers  are  confined  to  the  purchase 
of  stated  qualities  and  quantities  and  cannot,  as  a  rule,  buy  up 
large  shipments  of  mixed  qualities. 

4.     Competitive  Tenders. 

Another  public  medium  of  commercial  transactions  is  in 
inviting  sealed  tenders.  The  object  may  be  the  furnishing  of 
goods  or  of  services.  Bidders  are  invited,  on  the  basis  of  pub- 
lished conditions,  to  submit  sealed  tenders  undertaking  to  fur- 
nish the  goods  or  the  services  in  question  at  a  price  submitted 
by  them.  The  design  is  to  secure  the  lowest  bid,  or  the  most 
favorable  all  around  bid  conforming  to  the  conditions,  and  the 


166  INTERNATIONAL  COMMERCE 

business  is  adjudicated  after  the  examination  of  the  tenders  to 
the  successful  bidder. 

Governments  and  other  public  bodies  in  the  first  instance,  as 
well  as  many  private  enterprises  and  corporations  such  as  private 
railways,  etc.,  are  in  the  habit  of  inviting  sealed  tenders  for  the 
covering  of  their  requirements.  The  reasons  for  this  practice 
are  manifold.  Administrative  organs  may  not  have  that  insight 
into  commercial  routine  of  the  supply  and  demand  in  the  mar- 
kets of  the  world  which  is  expected  of  commercial  firms,  or 
it  may  be  desired  to  avoid  even  the  appearance  of  partiality. 
Invitations  to  submit  sealed  tenders  may  be  issued  broadcast,  or 
be  restricted  to  a  list  of  responsible  firms  compiled  for  this  par- 
ticular purpose,  or  may  be  limited  to  firms  of  a  certain  nation- 
ality. It  is  advisable  for  exporting  concerns  to  seek  to  be  in- 
cluded in  such  lists  on  file  with  all  foreign  administrative  organs 
making  a  practice  of  inviting  sealed  tenders,  or  at  least  to  pro- 
vide for  being  informed  of  such  invitations  as  soon  as  they  are 
issued. 

If  it  is  the  purpose  of  auctions,  regular  and  the  Dutch  vari- 
ety, to  attain  the  most  favorable  results  from  the  point  of  view 
of  the  seller,  the  purpose  of  public  bodies  in  inviting  bids  is  to 
secure  the  most  favorable  results  from  the  point  of  view  of  the 
buyer.  The  lowest  price  is  the  desideratum  of  the  buyer.  The 
tendency  of  underbidding  in  sealed  tenders  may  frequently  keep 
away  responsible  firms  and  lead  to  undesirable  results.  For 
this  reason  it  is  frequently  the  practice  to  limit  the  invitation  to 
a  number  of  responsible  concerns,  or  not  to  accept  the  lowest 
bid  because  it  is  the  lowest.  It  is  in  countries  with  an  undevel- 
oped home  industry  that  foreign  producers  and  exporters  may 
most  successfully  bid  for  government  business  on  the  basis  of 
submitting  sealed  tenders. 

Invitations  for  sealed  tenders  in  most  countries  are  governed 
by  administrative  regulations.  They  are  generally  published  in 
official  and  private  newspapers,  and  in  case  of  countries  in  which 
the  nature  of  the  materials  or  services  required  necessitates  for- 
eign co-operation,  time  is  given  to  foreign  consuls,  commercial 
attaches,  importers,  etc.,  to  cable  to  their  connections  abroad  and 
to  induce  foreign  interested  parties  to  submit  their  bids.  It  is 
important  that  consulates  and  official  bodies  at  home  charged 


EXCHANGES  167 

with  the  promotion  of  national  commerce  interests  in  foreign 
countries  lose  no  time  in  acquainting  the  home  trade  with  all  pos- 
sibilities of  participating  successfully  in  submitting  sealed  tenders 
to  foreign  governments,  municipalities  and  other  bodies  asking 
for  bids.  The  conditions,  particularly  the  time  limit  of  submit- 
ing  the  bid,  may  make  cabling  in  detail  necessary,  or  the  appoint- 
ment of  a  legal  representative  for  the  required  formalities  may 
appear  imperative. 

The  invitation  for  sealed  tenders  generally  contains  all  de- 
tails of  the  materials  to  be  furnished,  with  frequently  elaborate 
provisions  for  tests,  quality  standards,  etc.  The  conditions  and 
specifications  may  be  so  detailed  and  voluminous  that  they  are 
frequently  contained  in  a  special  book  and  the  invitation  men- 
tions the  book  and  where  it  may  be  obtained. 

Many  countries  have  elaborated  general  conditions  and 
standard  specifications  which  govern  all  tenders  for  various  de- 
partments of  the  government,  such  as  the  Army,  the  Navy,  the 
Railway  department,  and  issue  from  time  to  time  additional  spe- 
cific conditions  relating  to  the  specific  demand.  Sometimes  the 
invitation  to  bid  relates  to  indefinite  quantities  of  material,  the 
tenderer  being  required  to  offer  indefinite  quantities,  within  cer- 
tain limits,  or  indefinite  percentages  of  the  entire  quantity  of 
material  wanted  against  definite  orders  given  from  time  to  time 
in  due  course. 

The  tenderers  may  be  invited  to  submit  a  blanket  price 
covering  the  entire  material,  or  unit  prices  for  various  specified 
items,  or  a  basic  price  may  be  indicated,  and  the  tenderers  in- 
vited to  approach  it  as  far  as  possible.  In  material  the  shipment 
of  which  is  distributed  over  a  large  period  of  time  fluctuation 
clauses  may  be  permitted. 

Many  countries  require  that  bids  be  submitted  on  special 
blanks,  or  be  accompanied  with  revenue  stamps.  Cable  bids  are 
only  rarely  admitted,  and  frequently  the  appointment  of  a  local 
representative  is  insisted  on.  In  some  countries  the  extension 
of  the  time  limit  is  easier  to  obtain  than  in  others.  Many  im- 
pose the  submission  of  bonds  and  guarantees  for  performance. 

Participation  in  the  submission  of  sealed  tenders  is  often 
limited.  Frequently  foreign  firms  are  excluded,  so  that  a  for- 
eign bidder  must  secure  the  co-operation  of  native  firms.     Oc- 


168  INTERNATIONAL  COMMERCE 

casionally  middlemen  are  excluded  and  only  the  actual  manufac- 
turers are  permitted  to  compete. 

The  reading  and  the  examination  of  bids  may  be  public  or 
private.  Verbal  conferences  with  the  bidder's  representatives 
may  be  encouraged  or  frowned  upon.  In  many  undeveloped 
countries  conditions  exist  which  do  not  permit  a  self-respecting 
foreign  manufacturer  to  stoop  to  methods  required  to  secure  the 
business,  and  here  it  is  customary  to  enter  into  some  clean-cut 
arrangement  with  a  local  contractor,  leaving  it  to  him  to  partici- 
pate in  those  local  customs  with  which  a  foreigner  cannot  prop- 
erly concern  himself. 

The  adjudication  of  the  bid  may  be  effected  verbally,  when 
the  officials  select  purely  the  lowest  bid,  all  other  things  being 
equal.  The  next  step  is  the  conclusion  of  the  contract  in  which 
case  it  is  customary  to  have  a  representative  with  a  valid  power 
of  attorney  on  the  spot.  The  power  of  attorney  may  be  in  some 
cases  cabled,  being  legalized  by  the  consulate  general  of  the  pur- 
chasing government,  the  cablegram  being  sent  generally  through 
the  consulate  general  in  question.  In  some  instances  the  arrange- 
ment may  be  made  for  a  representative  of  the  purchasing  gov- 
rnment  to  conclude  the  contract  abroad  with  the  successful  bid- 
ders direct. 

5.    Exchanges. 

Exchanges,  bourses  or  boards  of  trade  are  associations  of 
business  men  meeting  regularly,  usually  every  week  day  during 
certain  hours,  in  specified  localities,  for  the  purpose  of  negotiat- 
ing business  in  commodities  or  in  auxiliary  commercial  services. 
The  name  refers  both  to  the  assemblage  and  to  the  place  of  as- 
sembly. 

The  place  itself  is  generally  a  closed  room,  though  there 
are  several  bodies  of  this  character  meeting  in  the  open,  as  the 
New  York  Outside  Securities  Exchange  (the  Curb),  etc.  The 
exchange  is  a  development  of  the  market  idea.  The  essential 
difference  between  the  market  and  the  exchange  is  that  the  com- 
modity dealt  in  is  not  in  evidence  in  the  exchange,  excepting  in 
the  form  of  samples  in  produce,  coffee  or  wool  exchanges,  etc. 
The  buyer  does  not  see  the  actual  goods.  The  goods  are  merely 


EXCHANGES  Lfl9 

named.  This  can  be  done  naturally  in  the  case  of  commodities 
of  certain  standard  qualities  which  are  handled  in  large  quanti- 
ties, as  various  grades  of  cotton,  etc.  Quantities  of  these  goods  are 
sold,  but  no  specific  lot  is  insisted  upon.  The  greater  the  degree 
to  which  goods  may  be  dealt  in  without  any  identification  of  par- 
ticular lots,  the  more  they  are  suitable  for  exchange  operations. 
This  being  to  a  large  extent  true  in  the  case  of  financial  securi- 
ties, one  share  of  common  stock  of  a  given  company  being  ex- 
actly equal  in  value  to  another  share  of  common  stock  of  the 
same  company,  or  one  bond  of  the  same  issue  being  identical  with 
another  bond  of  the  same  issue  and  denomination,  the  exchange 
business  in  financial  securities  is  more  prevalent  than  in  mer- 
chandise. On  the  other  hand  by  the  establishment  of  certain 
standard  types  of  certain  produce  such  as  cotton,  wool,  coffee, 
sugar,  wheat,  rye,  oats,  etc.,  a  similar  effect  is  obtained  artificially 
for  these  commodities,  and  they  are  thus  largely  traded  in  on 
exchanges  of  special  types. 

Apart  from  the  business  in  futures,  the  produce  exchange 
business  has  somewhat  of  the  character  of  a  market,  business 
being  concluded  on  the  basis  of  samples. 

Manufactured  goods  are  least  suitable  for  exchange  opera- 
tions. The  quality  of  these  is  determined  by  individual  char- 
acteristics; the  buyer  must  inspect  these,  and  the  sale  depends 
upon  a  special  confidence  created  in  the  mind  of  the  buyer  by 
the  representations  of  the  seller.  The  importance  of  the  indi- 
viduality of  the  contracting  parties  and  of  the  merchandise  itself 
precludes  the  handling  of  manufactured  goods  on  exchanges. 
The  identity  of  the  goods  here  generally  precludes  substitution, 
which  is  the  rule  in  produce. 

The  exchange  system,  by  a  regular  and  organized  meeting 
of  business  interests,  facilitates  the  conclusion  of  commercial 
transactions  and  a  clear  survey  of  market  conditions.  Herein 
is  the  principal  merit  of  the  system.  But  the  regular  conclusion 
of  huge  transactions  without  the  actual  transfer  of  commodities 
has  led  to  speculation  in  futures  on  a  large  scale,  which  oc- 
casionally has  been  the  cause  of  many  economic  evils.  For  trans- 
actions effected  for  purely  speculative  purposes,  in  order  to 
benefit  by  a  price  difference,  have  produced  a  market  within  the 
market.    Usually,  of  course,  actual  market  conditions  guide  the 


170  INTEENATIONAL  COMMEBCE 

speculative  market  in  the  fixing  of  prices,  but  the  morbid  sen- 
sitiveness which  the  speculative  market  exhibits  towards  all  oc- 
currences of  even  passing  moment  which  can  affect  the  prices 
leads  to  violent  fluctuations  of  prices.  The  speculative  market 
in  its  price  fixing  is  therefore  not  the  ideal  expression  of  actual 
market  conditions,  but  rather  an  occasionally  disquieting  and  dis- 
turbing element. 

In  international  commerce,  exchange  operations  are  of  mo- 
ment from  the  point  of  view  of  trading  in  bullion  and  in  foreign 
exchange  (affecting  the  market  rate  of  bills  in  international  set- 
tlements), and  in  produce  of  various  kinds,  futures  and  options 
on  cotton,  wool,  coffee,  sugar,  etc.,  affecting  the  market  price  of 
these  commodities. 


CHAPTER  X. 

The  Sales  Contract  in  International  Commerce. 

i.     The  Form  of  the  Contract. 

In  analyzing  the  fact  material  in  international  commercial 
transactions  with  a  view  to  developing  a  systematic  presentation 
of  the  principles  of  international  commerce  from  the  merchan- 
dizing point  of  view,  rather  than  as  a  branch  of  national  econo- 
mics, we  discover  a  central  technical  process,  namely  the  sale. 

Our  review  of  the  organization  of  international  commerce, 
with  the  discussions  of  economic  and  political  factors  concerned 
in  its  development,  and  of  the  various  media  used  in  the  car- 
rying on  of  the  individual  transactions  of  international  commerce, 
was  a  preliminary  step  to  the  discussion  of  the  central  fact  in 
international  merchandizing,  namely  the  conclusion  of  the  sales 
contract,  with  an  analysis  of  its  forms,  contents  and  the  rights 
and  obligations  established  by  it  between  the  parties  thereto. 

From  the  point  of  view  of  the  commercial  laws  of  most  coun- 
tries the  conclusion  of  contracts  relating  to  commercial  transac- 
tions is  not  dependent,  as  far  as  its  validity  is  concerned,  upon 
any  hard  and  fast  forms.  Commercial  usage  requires  this  inde- 
pendence, since  it  is  the  practice  to  use  a  variety  of  forms  or 
in  many  instances  to  conclude  business  informally.  A  sale 
may  be  effected  verbally  or  over  the  telephone  and  be  bind- 
ing on  both  parties.  Even  silence  may  be  construed  by  usage 
to  mean  a  concurrence  establishing  a  contract  relationship.  In 
the  case  of  such  silent  agreement,  however,  there  is  generally 
a  supplementary  basis  in  some  written  document.  In  some  lines 
of  business  goods  are  sent  for  inspection  or  selection,  and  the 
failure  to  return  same  within  a  specified  time  may  be  regarded 
by  commercial  usage  as  acceptance  and  the  conclusion  of  a  sales 
contract. 

The  manifest  possibility  of  errors  and  misunderstandings, 
however,  has  led  to  the  almost  universal  adoption  in  commerce 


172  INTERNATIONAL  COMME1U  !E 

of  written  documents  for  the  purpose  of  definitely  determining 
the  details  of  a  contractual  relationship  in  the  sale  of  merchan- 
dise, even  where  a  verbal  agreement  precedes  it.  This  is  even 
true  of  cases  when  merchandise  is  bought,  sold  and  delivered  on 
the  spot,  as  in  the  case  of  purchases  at  auctions,  or  in  exchange 
transactions.  And  similarly  verbal  understandings  between  buy- 
ers and  the  representatives  or  traveling  salesmen  of  the  seller  are 
confirmed  by  the  selling  firm. 

If  such  a  confirmation  contains  any  points  of  divergence 
from  the  verbal  agreement,  and  the  deviations  are  against  the 
interest  of  the  other  contracting  party,  it  is  invalid  without  the 
acceptance  of  the  latter.  But  if  the  confirmation  merely  fills  out 
details  left  open  in  the  verbal  agreement,  these  details  are  gen- 
erally assumed  to  be  binding  on  the  other  contracting  party,  pro- 
vided they  do  not  conflict  with  commercial  usage  or  laws.  Thus 
it  is  the  practice  of  effecting  sales  through  traveling  salesmen 
and  later  confirming  same  on  a  printed  form  containing  on  the 
reverse  a  series  of  sales  conditions,  some  of  which  may  have  been 
unknown  at  the  time  to  the  buyer.  Ordinarily  these  sales  con- 
ditions do  not  conflict  with  commercial  usage,  and  only  rarely, 
in  commercially  backward  countries,  will  the  buyer  object  to 
them.  It  is,  therefore,  advisable  in  all  cases  for  the  salesman  or 
agent  to  acquaint  the  buyer  with  the  sales  conditions  of  the 
seller,  by  calling  his  attention  to  them.  The  return  of  a  dupli- 
cate sales  contract  form  containing  such  a  list  of  conditions  on 
the  reverse,  with  the  signature  of  the  buyer,  shows  his  positive 
acceptance  of  same,  even  if  these  sales  conditions  deviate  in  some 
respects  from  the  verbal  agreement  with  the  salesman. 

In  the  general  run  of  sales  transactions  in  international  com- 
merce, whether  in  sales  for  own  account  or  for  the  account  of 
others,  the  conclusion  of  contracts  is  effected  by  correspondence. 
It  generally  consists  of  a  letter,  a  counter  letter  and  a  supple- 
mentary bill.  The  basis  of  the  contract  is  generally  a  letter 
containing  an  offer  of  the  seller  or  a  letter  containing  an  order 
of  the  buyer.  The  offer  may  be  firm,  that  is  binding  upon  the 
seller,  or  it  may  be  a  free  offer  subject  to  conditions,  such  as 
prior  sale.  The  firm  offer  usually  binds  the  seller  for  a  certain 
specified  time  determined  by  commercial  usage  or  special  agree- 


SALES  CONTRACTS:  FORM  173 

ment ;  the  firm  offer  may  be  made  subject  to  certain  eventuali- 
ties such  as  the  possibility  of  securing  freight  accommodation 
at  a  certain  price.  Only  the  firm  offer  may  be  considered  as 
an  offer  providing  a  basis  for  a  contract.  Free  offers,  or  offers 
subject  to  prior  sale,  are  considered  merely  as  invitations  to  buy, 
without  binding  the  seller. 

Both  the  offer  and  the  order  require  an  acceptance  by  the 
other  contracting  party  before  forming  the  basis  of  the  contract. 
The  offer  being  accepted  by  the  buyer,  leads  the  buyer  to  send 
a  written  order.  The  order  being  accepted  by  the  seller,  leads 
the  seller  to  send  the  buyer  a  written  acceptance  in  one  of  the 
various  forms  used  by  the  trade,  such  as  a  sales  memorandum, 
later  followed  by  a  detailed  sales  contract  form,  and  when  the 
goods  are  shipped  by  invoice. 

The  counter  letter  generally  briefly  cites  the  contents  of  the 
offer  or  of  the  order  as  the  case  may  be,  quoting  the  date  and 
the  document  file  number,  or  in  the  case  of  the  order  it  may 
limit  the  acceptance  to  a  specified  lot  or  quantity  contained  in 
the  offer. 

If  the  acceptance  letter  contains  clauses  which  do  not  cor- 
respond with  the  original  contract  basis,  either  contained  in  the 
original  offer  or  order  or  determined  by  commercial  usage,  the 
acceptance  is  not  perfect  and  creates  a  counter-offer,  unless  the 
deviation  is  of  immaterial  nature. 

But  when  the  seller  allows  some  time  to  elapse  before  send- 
ing the  buyer  a  sales  contract  or  shipping  notice,  and  material 
deviations  occur  in  same  from  the  contractual  basis  furnished 
by  the  order,  the  practice  is  to  regard  it  as  a  new  sales  offer  ac- 
companied by  shipment  of  the  offered  goods,  and  only  when  the 
buyer  approves  it  and  accepts  it,  though  aware  of  the  deviations, 
does  he  signify  his  agreement,  perfecting  the  contract.  As  an 
example  may  be  cited  the  shipment  of  sizes  deviating  from  the 
order,  perhaps  in  order  to  save  time,  the  desired  sizes  being  un- 
available and  the  seller  assuming  the  responsibility  of  shipping 
sizes  that  he  believes  will  answer  the  buyer's  purpose. 

An  invoice  acc6mpanying  the  letter  is  considered  a  supple- 
ment to  the  contents  of  the  latter.  Sent  alone,  it  takes  the  place 
fcf  the  letter,    The  CSnttfttfi  of  the  invoice,  inskding  the  printed 


174  INTERNATIONAL  COMMERCE 

clauses  thereon,  are  considered  equivalent  in  importance  to  a 
written  communication.  If  the  invoice  changes  the  existing  con- 
tractual conditions  in  the  interest  of  the  seller,  other  than  the 
filling  in  of  details  left  open  in  preliminary  correspondence  or 
verbal  agreements,  it  is  usual  to  have  the  buyer's  express  ap- 
proval of  the  deviations  before  considering  the  latter  as  binding 
upon  him.  Still  the  invoice  is  a  document  the  contents  of  which 
form  an  integral  part  of  the  contract  and  are  of  great  import- 
ance in  litigation  as  shifting  the  burden  of  proof  from  one  con- 
tracting party  to  the  other.  So-called  pro  forma  invoices,  sent 
out  for  the  purpose  of  information  and  not  for  the  purpose  of 
billing,  may  be  either  binding  offers  or  non-obligatory  offers  in 
accordance  with  the  wording  of  the  letter  accompanying  same. 
Invoices  accompanying  consignment  stocks  are  documents  creat- 
ing in  a  sense  a  trust  relationship. 

In  addition  to  ordinary  letters  accepting  orders,  there  are 
also  used  printed  forms,  such  as  sales  memoranda  and  contract 
forms  covering  the  sale.  These  forms  differ  from  ordinary  let- 
ters in  that  they  are  separated  from  miscellaneous  communica- 
tions and  have  for  their  purpose  and  object  the  fixing  of  the 
details  of  the  business  transaction  exclusively.  In  ordinary  cor- 
respondence the  exchange  of  letters  leads  to  the  conclusion  of 
a  commerical  transaction;  the  contract  forms  mentioned,  how- 
ever, are  based  upon  business  already  concluded.  A  sales  memo- 
randum, as  the  word  indicates,  is  a  brief  document  containing 
the  following  data :  the  date,  the  name  of  the  seller,  of  the  buyer, 
in  certain  cases  of  the  broker,  a  description  of  the  quality  and 
an  indication  of  the  quantity  of  goods,  price,  delivery,  terms  of 
payment,  etc.  In  its  simplest  form  the  sales  memorandum  is 
not  an  addressed  communication.  Occasionally  it  is,  however, 
expanded  into  a  sales  letter  with  several  printed  clauses,  ad- 
dressed and  ending  with  a  formal  salutation  and  signature.  Con- 
tract forms  usually  contain  a  series  of  very  detailed  stipulations, 
generally  printed  on  the  reverse.  As  distinct  from  contracts  of 
non-commercial  character,  they  are  not  always  made  out  in  dup- 
licate and  signed  by  both  parties,  though  the  most  approved  form 
is  in  duplicate,  with  a  clause  at  bottom  marked  "Accepted,"  for 
the  signature  of  the  buyer. 

The  order  form  known  as  "indent"  used  generally  in  the 


SALES  CONTRACTS:  USAGE  175 

Far  East  trade,  is  treated  specially  elsewhere ;  it  is  not  indicative 
of  a  definite  business  conclusion  until  acceptance  has  been  sig- 
nified by  the  seller. 

2.     The  Sales  Contract  and  Commercial  Usage. 

Under  commercial  usage  is  understood  a  practice  adopted 
by  commerce  in  the  carrying  out  of  commercial  transactions  and 
so  generally  adhered  to  that  a  deviation  from  it  appears  excep- 
tional. A  practice  which  is  frequent,  but  is  not  the  rule,  may 
be  referred  to  as  commercial  usage,  but  is  not  strictly  so.  There 
are  usages  which  have  no  reference  to  rights  and  obligations, 
and  while  of  no  importance  as  affecting  contracts,  they  are 
worthy  of  note  by  those  who  cultivate  foreign  markets. 

But  commercial  usages  affecting  rights  and  obligations,  in- 
sofar as  they  do  not  clash  with  statutory  or  common  laws  of  the 
countries  concerned,  are  given  due  weight  by  courts  of  all  com- 
mercial nations. 

Commercial  usages  have  conventional  validity  either  locally, 
in  a  defined  locality,  or  universally.  Some  usages  are  peculiar 
to  a  specific  place,  such  as  the  bazaar  in  an  Oriental  city.  They 
may  extend  to  the  entire  commerce  in  a  given  locality,  or  to 
certain  types  of  commerce.  So  there  may  be  special  usages  for 
markets,  auctions,  exchanges,  for  one  class  of  merchandise,  for 
export  or  import,  or  for  both,  for  the  commission  business,  for 
freight  and  insurance.  Finally  commercial  usage  may  govern 
relations  between  certain  groups  of  persons,  as  for  instance  be- 
tween traders  only,  or  between  traders  and  non-traders. 

One  of  the  indispensable  premises  of  a  valid  commercial 
usage  is  the  agreement  between  contracting  parties  to  abide  by 
it.  This  agreement  is  generally  tacit  and  need  not  be  specifically 
expressed.  It  is  valid,  unless  one  of  the  contracting  parties  spe- 
cifically exempts  it,  otherwise  it  is  understood  that  the  contract- 
ing parties  will  abide  by  prevailing  commercial  usages,  whether 
they  are  known  to  them  or  not. 

Commercial  usage  may  affect  contractual  rights  and  obliga- 
tions from  two  points  of  view.  Commercial  usage  may  supple- 
ment a  contract  in  regard  to  points  not  touched  upon  in  the  agree- 


376  INTERNATIONAL  COMMERCE 

ment,  and  secondly  commercial  usage  may  interpret  expressions 
and  designations  used  in  the  contract. 

In  some  countries  chambers  of  commerce,  exchanges  and 
other  public  bodies  (which  in  Continental  Europe,  and  in  coun- 
tries where  such  associations  are  patterned  after  the  Continental 
European  types,  have  an  official  or  semi-official  character)  are 
charged  wilth  the  task  of  codifying  commercial  usages.  Such 
compilations  are  of  importance  and  interest,  but  they  lend  no 
permanent  validity  to  commercial  usage.  Commercial  usage  is 
characterized  by  its  actual  existence.  Codification  has  no  value 
where  usage  changes  or  lapses  into  desuetude. 

But  in  some  countries  commercial  associations  have  suc- 
cessfully compiled  comprehensive  statements  of  current  contract 
conditions  with  an  authoritative  interpretation  of  terms  current 
in  their  territory.  Such  compilations  define  current  usage  and 
furnish  commerce  with  a  guidance  in  formulating  contracts. 
Thus  they  furnish  model  contract  conditions  which  are  frequent- 
ly referred  to  as  commercial  usage.  But  this  term  is  not  strictly 
correct  in  such  application.  They  are  rather  rules  and  regula- 
tions adopted  by  bodies  with  an  exchange  or  chamber  of  com- 
merce organization. 

In  countries  where  such  bodies  have  an  official  status,  and 
even  in  England  and  United  States  with  regard  to  their  own 
membership,  exchanges  of  various  classes  and  chambers  of  com- 
merce or  boards  of  trade  may  elaborate  forms  of  contracts-  for 
current  use.  All  exchange  transactions,  for  instance,  are  effected 
upon  the  basis  of  certain  regulations  adopted  by  these  bodies, 
and  these  regulations  assume  the  role  of  autonomous  laws. 

Outside  of  these  autonomous  regulations,  in  free  commercial 
intercourse,  it  is  customary  to  mention  expressly  that  the  con- 
tracting parties  are  willing  to  abide  by  the  regulations  of  certain 
bodies,  otherwise  it  must  not  be  assumed  that  these  regulations 
are  valid  for  them,  unless,  indeed,  these  regulations  merely  re- 
count existing  commercial  usages.  The  express  mention  may  be 
made  by  the  insertion  of  a  clause  in  the  contract,  such  as  "sub- 
ject to  the  rules  and  regulations  of  the  Chicago  Board  of  Trade, 
or  of  the  New  York  Underwriters  Association,"  or  as  the  case 
may  be.  In  England  it  is  customary  to  procure  blanks  of  such 
organizations  and  to  prepare  the  contract  on  such  blank*. 


CONTRACTS  AND  QUALITY  177 

Such  practices  are  very  convenient  and  time-saving  and  af- 
ford a  certain  amount  of  mutual  security  to  both  contracting 
parties.  They  save  the  parties  the  trouble  of  composing  detailed 
contract  clauses  dealing  with  matters  on  which  commercial  usage 
is  authoritative.  Thus  regulations  of  commercial  associations 
themselves  may  attain  the  force  of  commercial  usage,  substitut- 
ing sound  practice  for  objectionable  practices,  and  a  uniform 
practice  for  chaotic  practices. 

Such  regulated  conditions  of  contracts  have  as  a  rule  the 
tendency  to  induce  the  traders  to  adhere  to  them.  But  side  by 
side  with  this  tendency,  there  may  be  a  tendency  on  the  part  of 
third  parties  to  compel  their  adoption.  These  third  parties  are 
generally  factors  of  economic  importance.  Thus  the  great 
British  importers  have  brought  about  the  adoption  of  many  con- 
tract conditions  in  the  import  trade  into  the  United  Kingdom. 
And  in  Germany  combinations  of  producers  and  sellers  in  kar- 
tells have  gone  even  further,  and  forced  upon  the  trading  com- 
munity the  adoption  of  "model  sales  contract  conditions"  which 
are  anything  but  "model." 

3.     Contract  Obligations  Relating  to  the  Nature  and 
the  Quality  of  Goods. 

The  quality  of  the  goods  may  be  determined  in  the  conclu- 
sion of  a  sales  contract  in  several  ways. 

1.  By  means  of  the  examination  and  inspection  of  the  en- 
tire lot  sold  or  of  a  sample.  The  inspection  of  the  entire  lot 
sold,  for  the  determination  of  the  quality  of  the  goods,  may  be 
effected  at  the  place  of  sale.  It  is  therefore  a  practice  prevalent 
as  a  rule  in  the  sale  of  spot  goods,  as  for  instance  in  auctions 
and  market  places.  But  the  inspection  may  be  followed  also  by 
long  range  business,  the  vendor  obligating  himself  to  ship  the 
merchandise  as  inspected  by  the  buyer.  The  inspection  of 
the  merchandise,  insofar  the  vendor  has  not  through  the  use  of 
fraudulent  devices  made  it  imposssible  for  the  buyer  to  learn  the 
true  quality  of  goods,  makes  later  claims  on  the  basis  of  quality 
impossible. 

In  sales  on  trial,  if  the  buyer  after  the  lapse  of  a  specified 


178  INTERNATIONAL  COMMERCE 

time  presents  no  objection  to  quality,  he  is  bound  to  accept  the 
goods  and  is  debarred  from  bringing  up  claims  as  to  quality. 

In  the  case  of  so-called  "bargains  in  bulk,"  when  merchan- 
dise is  sold  "as  is,"  the  buyer  inspects  the  goods  before  purchase, 
no  agreement  is  made  as  to  quality,  and  the  buyer  cannot  bring 
up  claims  regarding  quality. 

b)  Samples,  on  the  basis  of  which  the  quality  of  merchan- 
dise referred  to  in  the  contract  is  determined,  may  be  of  various 
kinds :  a  small  lot  may  be  drawn  from  a  large  quantity  of  ma- 
terial, as  for  instance  a  small  bottle  of  oil ;  or  a  small  piece  taken 
from  a  large  whole,  as  in  case  of  textiles  (here  the  sample  is 
called  pattern)  or  a  test  piece  cut  off  from  a  steel  bar  or  rod, 
or  a  whole  article  such  as  a  tool  or  a  machine  may  be  used  as  a 
sample  and  the  contract  may  relate  to  duplicates,  or  individual 
component  parts  that  are  to  be  combined  into  a  whole,  as  parts 
of  an  electric  installation. 

The  inspection  of  a  sample  as  the  basis  of  business  con- 
clusion plays  an  important  part  in  international  commerce.  It 
is,  however,  not  always  possible  to  furnish  samples  of  goods. 
There  are  some  articles  of  so  individual  a  character  that  samples 
cannot  be  produced,  or  other  articles,  as  lumber  for  instance, 
where  it  is  of  little  use  to  furnish  samples.  In  business  trans- 
actions between  distant  points  sometimes  it  is  impossible  to  await 
the  sending  of  a  sample,  or  the  seller,  as  in  the  case  of  many 
oversea  products,  cannot  agree  to  bind  himself  for  several  months 
in  advance  to  furnish  products  identical  with  the  sample. 

But  in  many  products  certain  grades  and  qualities  are  de- 
termined as  standards,  and  samples  of  these  standards  are  de- 
posited where  they  are  accessible  to  the  trade,  and  in  this  case 
purchases  may  be  made  by  reference  to  these  standards  in  ac- 
cordance with  designations  adopted.  So  the  Liverpool  Cotton 
Association  has  classified  cotton  and  established  grades  as  de- 
termined by  samples  which  can  be  examined  at  the  headquarters 
of  the  Association.  Purchasing  of  this  character  is  termed  pur- 
chasing on  the  basis  of  samples.  The  seller  in  such  cases  is  obliged, 
unless  other  private  agreements  or  special  commercial  usages 
prevail,  to  furnish  goods  in  accordance  with  the  sample.  As  a 
rule  the  accordance  must  be  thorough.  But  in  some  instances 
deviations  are  permitted  within  certain  limits  if  the  nature  of  the 


CONTRACTS  AND  QUALITY  179 

merchandise  does  not  permit  of  a  perfect  conformance.  A  sample 
may  be  used  to  indicate  the  general  character  or  type  of  mer- 
chandise, it  being  understood  that  the  merchandise  need  not  be 
identical  with  the  sample.  Such  samples  are  known  as  type 
samples.  If  the  merchandise  sold  is  not  uniform  in  quality, 
samples  must  be  prepared  in  such  a  way  as  to  demonstrate  the 
average  quality  of  individual  portions.  In  many  classes  of  mer- 
chandise this  may  be  effected  by  means  of  a  mixture,  in  others 
a  number  of  individual  samples  is  required,  as  for  instance  in 
skins  and  furs. 

Close  to  purchasing  on  the  basis  of  samples  are  sales  con- 
tracts based  upon  quality  as  already  once  supplied  by  the  same 
vendor  to  the  same  buyer  or  as  supplied  by  a  third  vendor.  Trial 
orders  are  placed  with  the  aim  of  basing  future  transactions  on 
quality  as  supplied.  This  is  often  the  case  in  goods  where  the 
showing  of  small  samples  fails  to  give  an  adequate  idea  as  to 
the  run  of  a  shipment,  as  for  instance  in  the  case  of  lumber. 

While  the  vendor  generally  furnishes  the  sample,  it  may  be 
also  supplied  by  the  buyer.  This  renders  the  seller's  task  a  little 
more  difficult  in  furnishing  goods  fully  conforming  to  the  sample 
than  in  the  case  of  samples  of  his  own  make-up  furnished  by 
him  to  the  buyer.  This  is  particularly  true  of  cases  where  the 
goods  must  be  first  manufactured  to  conform  with  a  sample. 
The  buyer's  proneness  to  raise  unfounded  complaints  may  be 
greatly  encouraged  thereby.  If  the  exporter  selects  to  be  care- 
ful, he  will  in  such  cases  prepare  a  typical  counter  sample  of 
his  own  and  secure  the  buyer's  approval  of  it,  before  he  ships 
the  goods.  Commercial  usage  frequently  admits  certain  devia- 
tions from  samples  where  an  absolute  conformance  is  not  pos- 
sible. In  some  classes  of  merchandise  there  are  stipulated  de- 
viation limits  agreed  on  as  a  regular  occurrence  and  mentioned 
in  the  sales  contract. 

After  the  conclusion  of  the  sales  contract  the  sample  may 
be  taken  possession  of  by  the  vendor  or  by  the  buyer  or  left  in 
the  custody  of  a  third  party.  Or  the  vendor  and  the  buyer  may 
each  take  a  sample  which  is  identical  in  composition  with  the 
other.  The  vendor  retains  the  sample  when  it  has  been  sent  him 
with  the  order.  If  the  vendor  submits  the  sample,  the  usual 
practice  is  to  have  the  buyer  retain  it.     Buyers  in  export  mar- 


180  INTERNATIONAL  COMMERCE 

kets,  when  shown  samples  by  traveling  salesmen,  naturally  desire 
to  retain  the  sample,  since  the  salesman  may  leave  before  the 
ordered  goods  arrive.  The  samples  given  by  the  vendor  to  the 
buyer  are  sometimes  called  counter-samples.  In  the  case  of 
some  materials  these  samples  are  so  voluminous  that  the  buyer 
is  able  to  utilize  them  in  making  up  his  own  sales  samples.  It 
is  occasionally  the  practice  to  charge  for  such  extensive  samples. 
Some  New  York  textile  houses  make  a  charge  or  from  $50  to 
$500  for  their  sample  collections  and  credit  the  amount  to  the 
buyer  on  his  purchase. 

If  business  between  the  vendor  and  the  buyer  has  been  ne- 
gotiated by  a  broker,  the  broker  as  a  rule  retains  the  sample,  at 
least  until  the  business  is  concluded.  Some  European  and  over- 
sea exchanges  and  similar  organizations  provide  for  depositing 
of  the  samples  in  their  care.  This  is  frequently  done  in  the  case 
of  goods  in  which  the  quality  must  be  strictly  adhered  to,  while 
substitutions  in  samples  may  be  easily  effected,  as  for  instance 
in  grain.  It  is  the  custom  to  deposit  such  samples  in  sealed 
packages. 

In  addition  to  the  examination  of  the  sample  for  the  pur- 
pose of  determining  the  quality,  the  vendor  may  also  assure  the 
buyer  that  the  goods  possess  other  properties  which  cannot  be 
determined  by  an  examination  of  the  sample.  Or  certain  proper- 
ties may  be  expressly  eliminated.  In  such  cases  we  have  a  quali- 
fied purchase  on  the  basis  of  a  sample. 

c)  The  quality  of  merchandise  may  be  indicated  by  descrip- 
tion. This  is  done  when  the  properties  and  the  quality  of  a  mer- 
chandise are  determined  by  a  description  of  its  characteristics, 
perhaps  with  the  aid  of  sketches  and  drawings,  as  well  as  by  an 
enumeration  of  all  the  circumstances  which  allow  the  buyer  to 
form  a  judgment  with  regard  to  quality.  Among  the  latter  cir- 
cumstances may  be  mentioned  the  statement  as  to  the  origin,  the 
time  of  production,  the  manner  of  production,  etc.  The  char- 
acteristics denoting  quality  are,  of  course,  different  for  every 
class  of  merchandise.  The  outer  form,  the  surface  finish, 
optical  properties,  the  odor,  the  taste,  the  weight,  the  density,  the 
elasticity,  the  tensile  strength  and  other  mechanical  properties, 
the  durability,  etc.,  are  only  a  few  of  the  elements  which  may 
express  the  quality  of  a  commodity.    Such  quality  description* 


CONTRACTS  AND  QUALITY  181 

as  "middling,"  "A-i,"  etc.,  are  not  properly  classed  among  de- 
scriptive characteristics,  not  being  directly  descriptive. 

A  special  description  may  be  necessary  for  each  individual 
sales  contract,  as  in  the  case  of  furniture  made  to  special  de- 
signs, or  it  may  be  based  upon  regular  model  sales  conditions 
issued  by  a  commercial  body,  compelling  both  contracting  parties 
in  the  latter  case  to  limit  themselves  to  standards  therein  enu- 
merated. These  standard  qualities  may  have  special  designations 
to  differentiate  one  from  another  or  may  not. 

In  the  iron  and  steel  trades  in  the  United  States  certain 
standards  have  been  agreed  to  by  the  manufacturers,  such  as 
American  Railway  Engineers  Association  standard  specifications 
for  steel  bridges  and  railway  materials,  while  in  the  shipbuilding 
trade  Lloyd's  specifications  are  standard  in  many  countries. 

d)  Even  where  the  merchandise  is  individually  described, 
commercial  usage  frequently  demands  special  designations,  as  in 
the  case  of  yarns,  spirits,  wool,  grain,  the  designations  being  only 
understood  by  reference  to  usage  prevalent  in  the  particular 
trade.  These  numbers  and  trade  designations  are  neither  ac- 
curate literal  descriptions,  nor  scientific  standards  as  mentioned 
above,  but  a  compromise  between  the  two. 

A  few  quality  characteristics  may  be  found  worthy  of  spe- 
cial mention. 

The  relative  weight  of  an  article  or  merchandise  may  de- 
termine its  quality,  or  its  class,  as  in  grain  and  in  yarns.  The 
use  of  the  relative  weight  of  merchandise  in  descriptions  of  mer- 
chandise for  the  purpose  of  fixing  its  quality  in  sales  contracts 
we  find  in  grains  (grain  samples),  yarns  (yarn  number),  silk, 
skins,  leather,  paper,  oils  (specific  weight),  rails  (40-lb.,  60-lb., 
90-lb.  rails,  meaning  rails  weighing  so  many  pounds  per  yard). 
The  relative  weight  may  be  indicated  by  stating  how  many  linear 
units  go  to  a  weight  unit,  or  how  many  pieces  go  to  a  weight 
unit,  as  in  the  case  of  prunes,  or  how  much  a  cubic  measure 
weighs,  as  in  the  case  of  grains,  or  how  much  a  number  of  linear 
units  weighs  as  in  the  case  of  silk  and  of  rails.  Dimensions  as 
denoting  quality  need  not  be  based  on  weight,  as  for  instance  in 
glass  plates,  lumber,  etc.,  being  based  upon  quantity  and  surface 
measurements. 

The  yield  on  percentage  basis  or  otherwise  forms  a  quality 


382  INTERNATIONAL  COMMERCE 

description  in  the  case  of  many  raw  products.  Thus  we  have 
the  yield  in  refined  sugar  per  ioo  weight  units  of  cane  sugar, 
or  of  raw  sugar  derived  from  beet  sugar,  or  of  silk  derived  from 
cocoons. 

The  content  of  a  certain  element  in  the  merchandise  is  a 
somewhat  different  characteristic  from  the  foregoing.  The  con- 
tent may  relate  to  a  valuable  and  to  a  worthless*  material.  Thus 
we  may  have  the  sugar  content  of  a  beet,  the  polarization  (pure 
sugar  content)  of  sugar,  the  alcoholic  content  of  spirits  and 
patent  medicines,  etc.,  the  metal  content  of  ores,  the  carbon  con- 
tent of  steel,  the  impurity  content  of  oils.  We  speak  also  of 
the  mixture  contents  in  dry-liquid  commodities,  such  as  oleagi- 
nous seeds,  etc.  The  content  or  the  degree  of  the  admixture  of 
impurities  relates  always  to  the  content  of  the  valuable  material 
or  to  the  total  quantity  of  the  merchandise. 

Deviations  in  weights  and  dimensions  in  this  connection  are 
subject  to  settlement. 

e)  The  use  of  commercial  designations  to  denote  the  quality 
of  merchandise  may  be  based  on  special  circumstances  or  on 
commercial  usage  and  general  convention.  The  vendor  may  de- 
signate various  classes  and  qualities  of  his  merchandise  by  marks 
or  numbers  which  may  have  become  known  in  the  trade  con- 
cerned and  the  buyer  may  have  seen  samples  to  which  these 
marks  or  numbers  refer.  Or  the  designation  of  certain  conven- 
tional names  to  denote  strictly  denned  qualities  and  classes  of 
merchandise  may  have  become  current  in  commerce,  possibly 
through  adoption  by  a  commercial  body  such  as  some  wool  or 
cotton  or  produce  exchange. 

Thus  we  can  divide  quality  designations  in  two  groups,  the 
first  referring  to  the  merchandise  of  individual  firms,  the  second 
those  used  generally.  The  first  include  all  trade-marks  which 
by  names,  letters,  symbols  or  pictures,  sometimes  by  a  combina- 
tion of  figures  or  colors  distinguish  the  products  of  one  firm 
from  those  of  others  or  an  individual  product  of  one  firm  from 
other  products  of  the  same  firm.  In  the  raw  products  business 
the  vendor  uses  quality  designations  to  stamp  his  individual  as- 
sortments, in  oversea  trade  the  shipper  uses  a  special  shipping 
mark.  From  the  custom  of  branding  the  quality  designation  into 
metal  wares  or  upon  packings  of  many  other  wares  some  quality 


CONTRACTS  AND  QUALITY  l83 

designations  are  named  "brands,"  though  this  designation  has 
very  generally  come  to  be  synonymous  with  "make." 

These  special  quality  types  of  individual  concerns  are  dis- 
tinct from  general  quality  types,  or  standards  and  grades  which 
are  currently  employed  in  commerce  or  are  meant  to  be  employed 
as  such.  These  standards  and  grades  may  either  generally  char- 
acterize certain  qualities,  or  appear  as  exactly  fixed  qualities. 
In  the  latter  case  they  may  still  permit  a  certain  variation  scope 
and  need  not  be  observed  with  absolute  exactness.  They  are  fre- 
quently determined  by  special  bodies  authoritative  in  certain 
trades,  and  at  times,  as  in  the  case  of  metals  dealt  in  on  the 
London  and  the  New  York  Metal  Exchanges,  certain  brands 
may  be  cited  as  meeting  certain  standards.  Such  are  called  fixed 
standards  as  contrasted  with  the  commercially  current  standards 
which  are  based  solely  on  commercial  usage. 

Fixed  standards  frequently  are  based  upon  average  qualities. 
For  this  reason  they  often  bear  designations  such  as  "average,"' 
"middling,"  etc.  The  standard  usually  represents  the  average 
quality  direct.  Or  an  average  may  be  struck  on  the  basis  of  a 
rising  scale  of  standards  and  a  special  average  standard  type 
may  be  thus  arrived  at,  as  for  instance  "Santos  good  average" 
in  coffee. 

The  idea  of  average  quality  is  usually  based  upon  commer- 
cial usage.  If  in  such  case  a  sales  contract  contains  a  clause  re- 
quiring the  supply  of  fair  average  quality,  we  have  an  approxi- 
mate determination  of  quality.  Commercial  usage  is  satisfied  in 
such  cases  when  good  merchantable  quality  is  furnished. 

Upon  commercial  usage  are  based  also  such  descriptions  as 
superior,  good,  medium,  common,  or  fine,  fair,  middling,  ordina- 
ry, with  all  the  intermediate  gradations,  insofar  as  they  do  not 
refer  to  certain  fixed  types  in  particular  lines,  or  to  certain  speci- 
fically known  brands. 

The  mention  of  a  quality  in  the  contract  generally  means 
that  every  package  corresponding  to  the  shipment  item  must  be 
of  a  quality  conforming  to  the  type.  Or  it  may  be  understood 
that  the  average  of  all  packages  shall  conform  to  the  type.  An 
illustration  is  found  in  the  cotton  trade,  when  in  the  first  case 
"even  running"  and  in  the  second  case  "average"  furnish  a  sup- 
plementary indication  of  the  intent. 


184  INTERNATIONAL  COMMERCE 

Designations  of  quality  do  not  always  refer  to  identical 
qualities.  These  may  change  from  place  to  place,  or  from  time 
to  time.  In  the  cotton  and  the  coffee  trades  it  is  customary 
to  make  up  new  samples  every  season.  Even  the  brands  of  in- 
dividual firms  may  vary  from  time  to  time,  but  the  firm  should 
notify  its  customers  of  such  changes.  Such  variations  in  cor- 
respondence between  designation  and  the  quality  are  justified 
where  the  merchandise  depends  upon  a  variable  type  of  raw 
product  which  may  not  be  always  available  in  sufficient  quanti- 
ties of  uniform  quality.  In  commodities  which  may  vary  in 
quality  dependent  upon  the  outcome  of  crops  sometimes  the  vari- 
ation is  noted  in  demanding  or  offering  "fair  average  quality  of 
the  season." 

The  identification  of  certain  qualities  with  certain  designa- 
tions is  of  great  importance  in  international  commerce.  It 
greatly  facilitates  the  sale  of  oversea  products  at  long  range. 
It  also  enables  exporters  and  producers  to  make  qualities  of 
merchandise  as  supplied  by  them  currently  known,  these  quali- 
ties assuming  a  definite  value.  Thus  the  trade  in  an  export 
market  may  demand  galvanized  sheets  equal  to  "Apollo"  brand, 
indicating  a  certain  standard  of  quality  established  by  the  intro- 
duction of  galvanized  sheets  of  that  brand.  When  a  certain 
brand  of  merchandise  has  attained  such  a  position  of  standard 
in  a  given  market,  it  has  secured  a  basis  for  a  growing  and 
established  trade. 

Under  the  law  of  most  countries  purchases  on  the  basis  of 
conventional  commercial  designations  are  considered  purchases 
on  the  basis  of  a  sample  or  of  description,  the  use  of  the  desig- 
nation, such  as  middling,  or  superfine,  etc.,  being  regarded  as  a 
description.  With  regard  to  purchase  on  the  basis  of  a  sample, 
distinction  must  be  made  whether  the  sample  is  an  individual 
one  or  represents  a  type.  The  first  is  the  case  in  the  use  of  com- 
mercial designations  taken  from  a  sample  or  pattern  book  or  in 
the  case  of  samples  submitted  in  individual  transactions,  and 
generally  in  the  case  of  a  conclusion  of  business  on  the  basis  of 
trade-marks  in  manufactured  goods.  In  raw  products,  or  in  com- 
modities for  which  exchanges  and  commercial  associations  fix 
generic  type  designations,  purchases  are  understood  to  be  made 
on  the  basis  of  type  or  generic  samples. 


CONTRACTS  AND  QUALITY  185 

Purchases  at  random  signify  that  the  merchandise  may  be 
delivered  irrespective  of  quality,  in  the  condition  in  which  it 
happens  to  be.  But  commercial  usage  understands  that  partially 
damaged  merchandise  can  only  be  delivered  under  a  random  pur- 
chase clause  if  the  damaged  merchandise  is  still  per  se  a  normal 
article  of  commerce.  In  oversea  imports  it  is  customary  to 
stipulate  that  sea  damage  must  not  exceed  10%  of  the  entire 
shipment,  or  waste  may  be  specifically  exempted  by  a  contract 
clause  or  by  commercial  usage. 

Purchases  of  merchandise  with  a  definite  quality  basis.  In 
such  purchases  it  is  understood  that  the  price  is  based  upon  a 
specific  quality,  but  that  the  vendor  may  furnish  other  qualities 
either  freely  or  within  certain  percentage  limits.  In  the  case  of 
furnishing  inferior  quality,  a  provision  may  be  made  in  the  con- 
tract reading  "any  lot  below may  be  returned,"  and 

it  is  understood  that  in  the  case  of  quality  below  that  established 
as  a  basis  the  vendor  must  reimburse  the  buyer,  and  vice  versa. 
This  is  doing  business  "with  mutual  allowances."  The  amount 
of  the  allowances  may  be  determined  by  contract  or  by  appeal 
to  sworn  experts  or  appraisers. 

Sales  contracts  with  future  specifications.  The  contract  de- 
termines the  class  of  goods.  The  buyer  is  granted  the  right  to 
specify  at  some  future  time  before  the  filling  of  the  contract 
(the  time  limit  being  generally  noted  in  the  contract  conditions) 
the  qualities  desired,  the  quantities  of  each  quality,  and  the  dis- 
tribution of  the  shipments  required  by  him.  Such  contracts  are 
generally  concluded  for  large  quantities  of  material,  leaving  it 
to  the  buyer's  choice  to  "call"  for  the  shipment  of  quantities  and 
qualities  successively  needed  by  him.  The  buyer  has  a  right  to 
specify  assortments  to  suit  himself.  Thus  the  buyer  may  con- 
tract for  the  delivery  to  him  within  one  year  of  50,000  kegs  of 
nails,  and  indicate  from  month  to  month  what  sizes  and  qualities 
he  desires.  A  variation  of  this  is  where  the  buyer  and  the  seller 
agree  upon  a  definite  quantity  of  each  quality  which  the  buyer 
must  accept  and  the  seller  must  furnish  during  a  certain  period, 
but  the  buyer  retains  the  choice  of  assortments  from  time  to 
time,  though  in  the  aggregate  a  definite  quantity  of  each  quality 
must  be  shipped  and  accepted.  The  determination  of  the  con- 
formance of  the  goods,  as  regards  quality,  to  the  contents  of  a 


186  INTERNATIONAL  COMMERCE 

sales  contract  must  be  effected,  under  certain  conditions  either 
stipulated  in  the  contract  or  prescribed  by  commercial  usage. 

The  place  where  the  buyer  must  examine  and  determine  the 
conformance  of  the  goods  to  the  stipulations  of  the  sales  con- 
tract in  order  to  be  able  to  bring  up  valid  claims  for  non-con- 
formance, is  usually  the  place  of  performance,  or  that  place 
where  the  goods  pass  in  accordance  with  the  contract  from  the 
power  and  possession  of  the  seller  into  the  possession  of  the  buyer 
or  of  a  person  authorized  by  the  buyer  to  accept  the  goods,  thus 
terminating  the  contractual  obligations  of  the  vendor.  The 
moment  the  vendor  has  delivered  his  goods  he  is  free  from  fur- 
ther cares  about  them.  This  is  not  the  case,  however,  where 
goods  are  turned  over  to  a  forwarding  agent,  even  if  the  for- 
warding agent  has  been  selected  by  the  buyer. 

Theory  and  practice  in  international  commercial  law  have 
almost  without  exception  declared  the  law  of  the  place  of  per- 
formance to  be  applicable  to  sales  of  merchandise.  The  domi- 
cile of  the  vendor  is  generally  to  be  considered  as  the  place  of 
performance.  The  true  performance  of  the  obligations  of  the 
contract  is  accomplished  when  the  goods  are  shipped  by  the  ven- 
dor and  the  receipt  is  only  the  later  result  of  an  already  com- 
pleted performance.  It  is  therefore  the  vendor's  domicile  or  the 
location  of  his  business  which  constitutes  the  place  of  perform- 
ance. 

The  place  of  performance  is  distinct  from  the  place  of  ex- 
amination. It  becomes  important  to  determine  the  latter,  in  order 
to  judge  whether  a  claim  for  improper  or  defective  delivery  has 
been  made  in  time.  Especially  in  regard  to  sales  made  from  inland 
to  a  distant  point,  the  place  of  the  actual  delivery  to  the  con- 
signee must  be  considered  as  a  place  of  examination,  for  it  is 
usually  only  when  the  actual  disposition  over  the  goods  is  ac- 
quired that  the  vendee  has  the  opportunity  to  discover  their  con- 
dition. 

This    principle    is    subject    to    the    following    exceptions : 

a)  where  the  parties  have  expressed  a  clear  intention  otherwise; 

b)  where  an  agent  or  forwarder  has  been  designated  to  receive 
the  goods ;  c)  where  it  has  been  agreed  that  the  vendee  assumes 
all  the  risk  upon  the  delivery  of  the  goods  to  the  carrier,  the 


CONTRACTS  AND  QUALITY  L87 

railroad  or  steamship  company  becoming  the  agent  of  the  vendee ; 
d)  where  the  goods  are  not  to  be  received  by  the  vendee  or  his 
agent,  but  are  to  be  immediately  delivered  to  a  third  party. 

Contracts  in  relation  to  large  workshop  enterprises  (such  as 
building  of  machinery  and  apparatus)  are  regularly  subjected 
to  the  system  of  law  under  which  the  work  is  performed. 

A  provision  is  often  found  to  the  effect  that  "the  place  of 
performance  is  X,"  X  being  where  the  article  is  manufactured. 
It  does  not  follow  from  such  a  provision  that  the  parties  have 
mutually  submitted  tiieir  rights  to  an  objective  system  of  law. 
This  is  true  of  cases  where,  for  instance,  machinery  has  been 
manufactured  in  one  country  and  installed  in  another  (F.  Meili, 
"International  Civil  and  Commercial  Law,"  translated  and  sup- 
plemented by  Arthur  K.  Kuhn). 

Usually  the  goods  must  be  delivered  to  the  buyer  in  the 
community  where  he  maintains  his  place  of  business.  For  this 
reason  ordinarily  this  is  the  place  where  the  buyer  must  deter- 
mine the  conformance  of  his  goods  as  to  quality  to  the  condi- 
tions of  the  contract. 

The  exceptions  to  this  are  the  following: 

i.  Where  both  of  the  contracting  parties  have  their  place 
of  business  in  the  same  town,  and  the  buyer  who  has  sold  the 
merchandise  to  a  third  party  instructs  the  seller  to  deliver  the 
goods  in  the  town  where  the  third  party  is  located.  Here  the 
place  of  the  ultimate  customer  is  regarded  by  commercial  usage 
as  the  place  where  the  conformance  of  the  merchandise  to  the 
order  as  regards  quality  is  determined.  This  is  done  particularly 
in  the  case  of  goods  which  cannot  be  taken  out  of  the  outward 
packing  before  reaching  destination. 

2.  Where  both  of  the  contracting  parties  reside  in  different 
localities  and  the  buyer  directs  that  the  goods  be  delivered  to  his 
customer  residing  in  a  third  locality. 

In  the  export  trade  it  is  frequently  agreed  between  seller 
and  buyer  that  delivery  must  take  place  where  the  seller  resides 
and  the  quality  of  the  goods  determined  right  there,  the  ex- 
amination being  left  to  a  third  party.  Thus  in  the  iron  and  steel 
trades  and  in  shipbuilding  materials  a  regular  inspection  service 
is  maintained  in  the  industrial  countries,  the  customer  paying  the 
cost  of  the  inspection,  and  the  inspecting  certificate  is  regarded 


188  INTERNATIONAL  COMMERCE 

as  a  sufficient  evidence  of  quality.  When  the  buyer  personally 
appears  at  the  place  of  sale  and  the  goods  are  ready,  as  in  the 
case  of  auctions,  the  determination  of  quality  conformance  is 
generally  effected  at  the  place  of  sale. 

When  the  seller  sends  the  buyer  a  so-called  reference  sample 
showing  the  quality  of  the  goods,  the  purpose  being  to  save  the 
buyer  the  trouble  of  examining  the  goods,  commercial  usage  ex- 
pects that  the  buyer  assume  the  responsibility  for  damage  in  case 
the  goods  as  delivered  do  not  conform  to  the  sample;  if  the 
buyer,  assuming  that  the  goods  conform  to  the  sample,  has  sold 
the  goods  elsewhere  without  having  thoroughly  examined  them, 
he  still  has  the  right  to  demand  indemnification  as  soon  as  his 
customer  notifies  him  of  non-conformance.  If  the  defects,  how- 
ever, are  noticeable  on  the  sample  and  the  buyer  has  accepted 
the  sample,  the  buyer  must  accept  the  goods  without  finding  fault 
with  the  quality,  particularly  where  the  purpose  of  the  sample 
is  to  acquaint  the  buyer  with  the  quality  of  the  goods. 

The  time  limit  for  determining  the  non-conformance  of  the 
goods  as  to  quality  to  the  contract  generally  expires  after  the 
acceptance  of  the  goods,  unless  the  seller  undertakes  an  express 
guarantee,  or  provisions  to  the  contrary  are  made  in  the  con- 
tract. It  is  customary  to  state  in  the  contract  within  what  period 
any  claims  as  to  defects  in  quality  will  be  considered  by  the 
seller,  but  commercial  usage  provides  that  where  it  is  customary 
to  sell  the  goods  to  third  parties  in  the  original  packing,  the 
buyer  is  entitled  to  make  claims  for  re-imbursement  as  soon  as 
he  receives  a  complaint  from  his  customer. 

In  some  cases,  as  in  machinery,  defects  may  not  be  capable 
of  determination  until  the  machine  has  been  in  operation  for  a 
considerable  period.  It  is  customary  in  articles  of  this  char- 
acter to  make  a  suitable  express  provision  in  the  contract. 

In  order  to  maintain  his  rights  the  buyer  must  only  bring 
up  his  claim  without  loss  of  time  as  soon  as  he  discovers  the  de- 
fect. The  form  in  which  he  brings  his  claim  is  immaterial,  ex- 
cepting in  certain  products  in  which  commercial  usage  and  the 
regulations  of  cotton,  wool,  fur  and  similar  exchanges  prescribe 
it. 

The  buyer  has  the  obligation  to  examine  the  goods  thorough- 
ly when  delivered.     If  he  finds  defects,  it  is   frequently  cus- 


CONTRACTS  AND  QUALITY  189 

tomary  to  have  the  goods  examined  by  sworn  experts  or  testing 
institutions.  In  cases  where  he  accepts  the  certificate  of  the  ex- 
amining inspectors  at  the  place  of  shipment  he  has  no  further 
right  to  make  claims.  The  examination  for  defects  on  delivery 
is  effected  by  taking  random  samples,  where  possible,  and  where 
the  merchandise  is  of  uniform  composition.  In  many  instances 
it  is  impossible  to  examine  the  goods  otherwise  than  by  actual 
use  or  consumption  of  a  part  of  the  shipment. 

The  tendency  of  commercial  usages  and  commercial  agree- 
ments is  to  prevent  unjustified  claims  for  defects  and  to  protect 
the  interests  of  both  the  buyer  and  the  seller,  basing  actions  in 
such  matters  on  common  sense  and  fair  dealings.  For  this  rea- 
son a  number  of  regulations  are  current  for  the  determination 
of  defects  and  are  observed  by  force  of  commercial  usage  in 
oversea  transactions. 

It  is  particularly  in  oversea  transactions  that  differences 
with  regard  to  the  quality  of  the  goods  occur  between  buyer  and 
seller  and  the  settlement  is  very  difficult  on  account  of  the  great 
distance  separating  the  contracting  parties.  It  is  in  oversea  trade 
customary  to  have  the  goods  examined  by  the  addressee,  if  pos- 
sible in  the  presence  of  a  representative  of  the  seller.  This  is 
done  overseas  in  the  importation  or  goods  from  Europe  and 
America  generally  in  the  custom-house  in  the  presence  of  the 
sales  agent.  A  similar  proceeding  is  customary  in  the  importa- 
tion of  oversea  products  into  European  countries  or  United 
States.  Where  samples  are  to  be  taken  from  the  shipment  to 
determine  its  quality,  it  is  generally  provided  what  percentage 
of  the  packages  are  to  be  inspected  for  samples.  The  quality 
may  be  determined  by  sworn  experts,  or  certificates  of  authori- 
ties may  be  obtained  in  some  materials.  These  certificates  may 
be  provided  by  the  seller  before  shipment  or  by  the  buyer  after 
delivery. 

The  first  group  of  certificates  includes  certificates  of  origin, 
testing  certificates  in  iron  and  steel  production,  certificates  of 
analysis,  official  certificates  of  inspection  as  in  the  case  of  Amer- 
ican meat  products,  etc.  Particular  importance  is  attached  to  certi- 
ficates which  attest  the  conformance  of  the  merchandise  to  some 
general  quality  types  or  standards,  as  the  inspector's  certificate 
in  the  case  of  cereals,  the  government  certificates  in  the  case  of 


190  INTERNATIONAL  COMMERCE 

the  conformance  of  certain  Australian  products  to  established 
standards.  Governments  may,  for  the  sake  of  promoting  export, 
guarantee  the  quality  of  certain  exported  products.  Such  a  step 
has  been  urged  recently  for  the  exports  of  "Made  in  America" 
goods.  Commercial  usage  and  private  agreements  may  establish 
that  the  seller's  authoritative  certificate  as  to  quality  be  con- 
sidered final. 

The  second  group  of  certificates  are  those  which  by  agree- 
ment of  the  contracting  parties  are  obtained  after  delivery.  This 
includes  so-called  surveys  through  sworn  exgerts. 

As  far  as  the  consequences  of  defects  found  in  goods  is 
concerned,  commercial  usage  provides  for  a  rejection  of  the 
goods  only  in  the  case  of  very  marked  defects  or  deviations  in 
quality  from  that  established  in  the  contract.  Commercial  usage 
rules  differently  in  case  of  various  merchandise  and  various  mar- 
kets as  to  the  rights  of  the  buyer;  he  may  reject  a  portion  of 
the  shipment  and  accept  the  balance.  He  may  demand  a  ship- 
ment of  merchandise  to  take  the  place  of  the  defective  ship- 
ment, or  as  in  the  case  of  most  oversea  products  he  has  the 
right  to  demand  reimbursement  for  the  quality  difference.  But 
as  a  rule  certain  degrees  of  variation  are  allowed  the  seller  and 
the  variance  between  the  quality  shipped  and  the  quality  as 
established  in  the  contract  must  be  marked  for  a  valid  claim. 

As  a  rule  the  seller  of  manufactured  goods  is  more  strictly 
obligated  with  regard  to  the  quality  clauses  in  the  contract  than 
the  seller  of  produce. 

4.     Contract  Obligations  Relating  to  the  Quantity 
of  Goods. 

The  quantity  of  the  merchandise  which  the  seller  obligates 
himself  to  deliver  to  the  buyer  is  indicated  in  the  contract  either 
by  accurate  or  approximate  measurements. 

This  indication  is  made,  in  accordance  with  the  class  of 
merchandise,  in  length,  surface,  cubic  or  weight  dimensions,  or 
in  quantities  of  units.  The  measurements  are  generally  indicated 
by  specifying  quantities  for  different  qualities  or  packing  units 
or  both. 

Private  agreements  and  commercial  usage  determine  largely 


CONTRACTS  AND  QUANTITY  L91 

the  method  of  measuring  the  goods.  Of  particular  importance 
is  this  in  the  case  of  goods  delivered  in  a  packed  condition,  when 
the  contract  must  clearly  stipulate  (unless  commercial  usage 
renders  this  unnecessary)  whether  the  weights  are  gross  (that 
is  include  the  packing),  or  "legal"  (according  to  the  practice  of 
several  Latin-American  countries,  including  the  interior  wrap- 
pings but  excluding  the  outer  packings)  or  net  (not  including 
either  packing  or  inner  wrappings). 

In  many  cases  even  accurate  indications  of  quantity  permit 
a  deviation  within  the  limits  of  a  percentage,  which  may  be  either 
stipulated  in  the  contract  or  established  by  commercial  usage. 

In  the  case  of  approximate  measurements  in  the  contract, 
the  deviations  are  frequently  determined  by  commercial  usage 
or  are  based  upon  special  agreements.  In  produce  dealings  5% 
is  the  usual  limit  of  permissible  quantity  deviations.  In  the  com- 
merce with  manufactured  goods  the  naming  of  approximate 
quantities  is  resorted  to  in  order  to  give  the  shipper  the  oppor- 
tunity of  adapting  the  quantity  of  material  furnished  to  the  di- 
mensions of  packages  or  the  capacity  of  the  transport  media,  in 
order  to  utilize  them  to  the  best  advantage. 

The  strictness  of  requirements  regarding  the  agreement  of 
the  performance  with  the  contractual  stipulation  in  regard  to 
the  quantity  depends  largely  upon  the  class  of  the  goods.  In 
valuable  unit  articles,  each  of  which  may  be  the  basis  of  a  com- 
mercial transaction,  the  quantity  must  be  strictly  observed ;  in 
articles  of  mass  consumption  a  slight  surplus  or  shortage  cannot 
greatly  affect  the  success  of  the  business,  and  a  greater  latitude 
is  permitted.  In  spot  dealings  exactness  in  quantities  can  be 
more  or  less  readily  determined,  and  it  is  therefore  more  strictly 
insisted  on,  whereas  in  oversea  shipments  quantity  deviations  are 
often  unavoidable  and  are  therefore  tolerated  within  certain 
limits. 

Where  the  quantity  of  the  merchandise  which  the  seller  is  to 
furnish  is  indicated  by  packing  units,  such  as  cases,  bales,  barrels, 
or  make-up  units  such  as  bolts  of  cloth,  or  packages  of  nails, 
it  is  necessary  to  indicate  the  weight  of  each  unit.  This  may  be 
accurate  or  approximate,  in  the  latter  case  being  calculated  on 
the  basis  of  average. 

Average  measurements  permit  a  rather  wide  divergence  in 


192  INTERNATIONAL  COMMERCE 

the  individual  packages,  but  the  total  deviation  must  not  exceed 
the  limits  established  by  commercial  usage,  generally  about  5%. 
Commercial  usage  frequently  interprets  certain  accurate 
measurements  as  approximate.  This  happens  particularly  in  the 
case  of  liquids  shipped  in  cooperage,  when  an  individual  pack- 
age customary  in  commerce  holds  approximately  a  certain  quan- 
tity of  liquid. 

Finally  a  contract  need  not  indicate  the  exact  measure- 
ments of  the  merchandise,  as  in  the  case  of  lots  of  goods  selected 
by  the  buyer  individually  and  reserved  for  him.  Thus  he  may 
buy  a  quantity  of  merchandise  in  bulk,  or  select  at  an  auction 
certain  lots  the  exact  dimensions  of  which  are  not  given. 

The  question  whether  the  seller  has  met  the  requirements 
as  to  quantity  stipulated  in  the  contract  is  determined  by  the 
quantity  as  delivered  at  the  place  of  destination.  The  question 
as  to  what  quantity  must  form  the  basis  of  the  invoice  is  an  en- 
tirely different  one  and  will  be  discussed  at  the  proper  time 
under  the  heading  of  invoices. 

The  examination  of  the  merchandise  as  to  correct  quantity 
can  be  made  either  in  order  to  determine  whether  the  seller  has 
fulfilled  his  contractual  obligations,  or  to  arrive  at  the  exact  basis 
for  the  cost  of  the  merchandise,  or  in  order  to  verify  the  seller's 
figuring.  Generally  the  first  of  these  purposes  can  be  combined 
with  the  two  others.  The  examination  as  to  the  quantity  of  the 
merchandise,  made  in  order  to  see  whether  the  seller  has  fulfilled 
his  contract  or  invoiced  the  goods  properly,  must  be  made  under 
certain  conditions  prescribed  by  usage,  in  order  to  be  valid. 

a)  The  place  of  the  examination.  Even  as  with  regard  to 
the  nature  of  the  goods  and  their  quality,  the  place  for  the  buyer 
to  examine  and  ascertain  the  quantity  of  the  goods  delivered  is 
the  place  of  destination.  But  since  losses  in  quantity  occur  more 
frequently  than  quality  defects  in  the  course  of  transportation; 
and  since  furthermore  it  is  difficult  to  determine  upon  delivery 
whether  the  loss  of  quantity  occurred  during  transportation  or 
before ;  and  finally  since  authoritative  certification  as  to  quantity 
can  be  so  readily  obtained  at  the  point  of  shipment,  very  fre- 
quently commercial  usage  prescribes  the  point  of  shipment  as 
the  place  where  the  shipment  must  be  examined  as  to  quantity. 

b)  Time  of  examination.     Very  few  commercial  countries 


CONTKACTS  AND  QUANTITY  19a 

prescribe  a  time  limit  for  the  riling  of  a  claim  for  shortage,  but 
commercial  usage  demands  that  the  buyer  examine  the  shipment 
for  any  shortage  as  promptly  as  possible  and  file  his  claim  with- 
out delay,  and  private  agreements  and  sales  conditions  may  de- 
mand this  examination  to  take  place  within  a  certain  specified 
time  limit.  The  shortage  may  be  already  indicated  in  the  seller's 
invoice,  and  need  not  necessarily  lead  to  the  filing  of  a  claim. 

c)  The  method  of  examination.  There  are  sometimes  con- 
siderable variations  in  results  arrived  at  by  measuring  and  weigh- 
ing merchandise  by  various  apparatus  or  due  to  the  practice  of 
measuring  and  weighing  merchandise  in  round  figures.  It  is  of 
importance  whether  the  whole  merchandise  has  been  accurately 
measured  or  weighed  or  an  average  struck  on  the  basis  of  a  per- 
centage or  on  the  basis  of  the  weight  of  individual  packages. 
Commercial  usage  prescribes  a  certain  tolerance  for  such  varia- 
tions. 

Some  merchandise  suffers  natural  variations  in  measure- 
ments in  the  course  of  time.  There  are  highly  hygroscopic  sub- 
stances such  as  silk  and  pulp,  in  the  calculation  of  which  com- 
mercial usage  requires  the  recognition  of  a  certain  moisture 
content.  The  weight  may  be  based  upon  absolutely  dry  or  air 
dry  condition.  The  weight  in  absolutely  dry  condition  is  de- 
termined by  taking  samples,  drying  them,  and  calculating  the 
proportion.  The  addition  of  the  permissible  moisture  content  to 
the  absolutely  dry  weight  gives  the  commercial  weight  of  the 
merchandise.  Other  goods  such  as  leather,  yarns,  silk  fabrics 
may  be  artificially  weighed  with  fats,  colors,  starch,  barytes; 
these  too  are  regulated  by  commercial  usage.  Natural  varia- 
tions in  weight  and  measurements  after  delivery  has  been  ef- 
fected are  generally  borne  by  the  buyer. 

Where  the  examination  as  to  quantity  takes  place  on  the 
basis  of  a  different  system  of  measurement  than  that  used  by  the 
seller,  commercial  usage  prescribes  a  comparative  calculation 
with  the  aid  of  approved  conversion  tables. 

Certificates  with  regard  to  the  quantity  of  merchandise  are 
given  with  more  or  less  authority  by  transport  media,  such  as 
railways,  steamship  companies,  warehousing  companies,  cus- 
tom houses,  official  weighers  and  measurers,  etc.    The  certificate 


194=  INTERNATIONAL  COMMERCE 

may  be  a  separate  document  or  form  a  part  of  a  Bill  of  Lading, 
warehouse  receipt,  custom  house  receipt,  etc. 

The  furnishing  of  such  a  certificate  by  the  seller  may  be  re- 
garded by  commercial  usage  as  a  final  proof  of  quantity  delivered. 
Even  where  not  finally  decisive  it  is  a  very  important  proof. 
In  order  to  be  able  to  bring  a  valid  claim  for  shortage  the  buyer 
must  furnish  authoritative  certificates.  Contract  clauses  and 
commercial  usage  may  bind  him  to  furnish  such  proof,  other- 
wise he  is  held  by  the  invoiced  quantity  or  the  certificates  of  the 
transporting  media,  even  when  the  place  of  delivery  is  the  place 
of  the  performance  of  the  contract.  In  the  last  named  case, 
if  the  buyer  provides  authoritative  measurement  certificates,  the 
latter  are  finally  decisive. 

Consequences  of  delivering  quantities  not  in  accordance  with 
the  contract.  In  the  case  of  an  immaterial  shortage  commercial 
usage  requires  the  buyer  to  accept  the  shipment.  In  the  case  of 
material  shortage  he  is  not  bound  to  accept  it,  and  while  refusing 
it,  he  maintains  his  rights  of  claim  against  the  shipper  for  the 
whole  contract,  or  if  he  accepts  the  shipment  in  partial  fulfil- 
ment of  the  contract  then  in  regard  to  the  balance.  If  a  ma- 
terial overplus  is  shipped,  the  buyer  has  the  right  to  reject  the 
overplus.  Commercial  usage  prescribes  certain  rules  for  the 
commerce  in  oversea  products  in  this  connection,  which  will  be 
mentioned  in  due  course. 

5.    Contract  Obligations  Relating  to  Packing. 

Instructions  as  to  packing  may  be  expressly  given  to  the 
seller  in  the  sales  contract  or  may  be  tacitly  understood,  the  lat- 
ter particularly  on  the  basis  of  commercial  usage.  Such  in- 
structions may  be  given  even  subsequently,  provided  they  work 
no  hardship  on  the  seller,  or  the  buyer  agrees  to  reimburse  the 
seller  for  the  packing  material  already  employed  or  purchased 
in  accordance  with  the  contract. 

If  the  manner  of  packing  is  not  contractually  prescribed, 
the  seller  is  required  by  commercial  usage  to  ship  the  goods  in 
packing  strong  enough  and  suitable  for  the  means  of  transporta- 
tion employed,  using  ordinary  commercial  diligence. 

Even  where  the  transportation  risk  is  borne  by  the  buyer 


CONTRACTS  AND  PACKING  195 

the  seller's  commercial  prudence  will  lead  him  to  pack  his  goods 
in  a  reasonably  adequate  manner,  in  order  to  have  the  goods 
reach  the  buyer  in  a  satisfactory  condition  and  in  order  to  thus 
retain  the  buyer's  good-will.  But  in  those  cases  where  the  con- 
tract is  not  considered  as  fulfilled  until  the  goods  are  delivered, 
the  seller's  interest  in  the  question  of  proper  packing  is  manifest. 
With  regard  to  packing  the  following  usages  are  of  import- 
ance: 

a)  The  goods  may  be  shipped  unpacked  or  in  a  loose  im- 
mediate wrapping.  This  is  the  case  in  articles  of  considerable 
size  for  which  it  is  too  expensive  to  provide  a  complete  packing 
and  which  at  the  same  time  are  capable  of  withstanding  out- 
ward damage,  as  machines,  wagons,  etc.  Other  articles  may  be 
loaded  loose  upon  the  transport  medium,  as  rails,  ties,  wire,  etc. 
Some  of  these  articles  may  be  either  carefully  or  loosely  bur- 
lapped.  Grain  may  be  shipped  in  bulk.  Oils  may  be  shipped  in 
tank  vessels  or  tank  cars. 

b)  The  merchandise  may  be  protected  by  outer  packing. 
The  three  most  important  methods  of  packing  are  cases,  sacks 
and  barrels.  Cases  may  be  solid  or  in  the  nature  of  crates.  Crates 
are  cases  with  free  space  between  boards.  They  serve  to  pro- 
tect the  merchandise  only  from  being  crushed  or  knocked  against 
by  bigger  articles;  machines,  bicycles,  furniture,  etc.,  are  thus 
shipped;  or  crates  of  special  styles  are  used  for  merchandise 
which  requires  an  influx  of  air  to  keep  it  in  condition,  as  eggs. 
Sacks,  mostly  made  of  jute  or  gunny,  serve  for  the  packing  of 
dry  articles  which  may  be  shaken,  knocked  against  or  crushed 
without  suffering  appreciable  damage.  A  species  of  sack  is  a 
bale,  which  is  a  method  of  packing  reacting  elastically  to  press- 
ure, or  knocks,  and  may  be  rolled  or  thrown  without  suffering 
damage.  It  is  firmer,  stronger  and  larger  than  a  sack.  The  mer- 
chandise is  generally  pressed  into  it,  or  first  pressed  and  then 
baled.  Bales  also  include  the  packing  into  burlap  or  sacking  of 
several  hard  units,  as  knocked  down  furniture  parts,  which  are 
packed  and  sewn  into  sacking.  Sacks  or  bales  may  be  also  made 
of  matting,  straw,  hair,  palm  leaves,  or  a  combination  of  two 
such  wrappings  with  a  textile  wrapper,  and  in  such  instances 
they  have  special  names,  as  for  instance  fardels,  which  are 
bundles  from  the  Red  Sea  districts,  or  serons,  oblong  packages 


196  INTERNATIONAL  COMMERCE 

from  South  and  Central  America,  the  outer  wrapping  of  which 
is  raw  hide  put  on  and  sewed  together  in  green  condition,  form- 
ing a  compact  package  after  shrinking. 

Barrels  and  sacks  are  the  usual  packing  form  for  liquids, 
but  they  are  also  used  for  commodities  of  pasty  or  fatty  con- 
sistency, as  paints  and  greases,  or  for  dry  articles  such  as  nails, 
potatoes,  etc.,  or  for  pulverized  materials  such  as  flour  or 
powder.  A  variety  of  this  packing  are  metallic  drums  or  cylinders 
used  for  gases,  acids  and  inflammable  materials ;  hogsheads,  tierces, 
tubs,  pails  and  buckets  are  varieties  of  this  class  of  packing, 
which  is  generically  called  cooperage  and  is  roughly  divided 
into  tight  cooperage  and  slack  cooperage. 

Other  packages  are  cans  or  tins,  jugs,  baskets,  cardboard 
boxes. 

c)  The  merchandise  may  be  additionally  protected  by  in- 
terior wrappings.  Interior  wrappings  may  have  the  aim  of  re- 
ducing the  force  of  jars  and  knocks,  as  excelsior,  straw,  paper, 
shavings;  or  to  prevent  the  penetration  or  liquids  as  zink  and 
tin  lining,  oilcloth,  tar  cloth ;  intermediate  layers  may  be  inserted 
between  the  goods,  as  leaves  in  fruit  boxes;  each  unit  may  be 
wrapped  in  paper  or  straw,  or  several  may  be  wrapped  together. 
The  practice  of  enclosing  publicity  mater  has  nothing  to  do  with 
interior  wrapping,  and  must  be  indulged  in  with  care,  as  in  some 
countries  it  either  contravenes  customs  regulations  or  leads  to 
unforeseen  heavy  customs  duties  payable  by  the  addressee. 

The  outer  packing  contains  inscriptions,  particularly  marks 
and  numbers.  The  mark  consists  of  a  figure  or  of  characters  or 
a  combination  of  both,  with  numbers,  and  is  intended  to  char- 
acterize the  goods  as  originating  from  a  certain  firm,  either  pro- 
ducer or  trader.  This  is  very  important  for  the  period  that  the 
shipment  is  in  the  hands  of  third  parties,  the  carrier  or  the 
freight  forwarder  or  the  warehouseman.  It  is  necessary  to  use 
such  marks  as  cannot  be  readily  mistaken  for  the  marks  of 
others.  One  letter  is  therefore  generally  insufficient.  Good  in- 
delible marking  ink  is  generally  used.  Goods  on  which  it  is 
difficult  to  place  such  marks  are  marked  by  means  of  tags  that 
are  wired  to  same.  The  numbers  usually  serve  to  identify  in- 
dividual packages,  and  are  therefore  mostly  consecutive. 

The  marking  of  packages  may  be  of  particular  importance 


CONTRACTS  AND  PACKING  197 

in  re-selling.  The  re-seller  may  lay  much  stress  upon  the  manu- 
facturer's original  marking,  or  he  may  desire  to  suppress  it 
altogether,  prescribing  a  special  marking,  or  removing  the  ori- 
ginal marking  and  substituting  his  own  for  it. 

Other  markings  may  have  reference  to  the  origin  of  the 
goods,  such  as  "Made  in  U.  S.  A.",  "Made  Abroad",  etc.,  or 
relate  to  warnings,  as  "Fragile,"  "Use  no  Hooks,"  generally  in 
the  language  of  the  country  of  shipment  and  of  the  country  of 
destination.  Finally  packages  are  marked  by  the  shipper  with 
the  address  of  the  buyer,  generally  giving  the  place  of  destination 
in  full  and  using  prescribed  marks  for  the  addressee's  name. 

It  is  particularly  important  to  pack  goods  properly  for  ex- 
port. The  so-called  export  packing  must  protect  the  goods  from 
the  increased  perils  of  oversea  transport  and  yet  it  must  com- 
bine with  this  added  security  such  characteristics  that  will  serve 
to  avoid  superfluous  freight  and  customs  charges.  The  export 
packing  must  not  conflict  with  regulations  governing  packings 
imported  into  the  country  of  destination  or  into  an  intermediate 
country  in  transit.  The  goods  must  be  so  packed,  moreover, 
that  the  buyer  may  ship  them  to  his  customers  without  repacking 
them,  if  necessary. 

The  increased  perils  of  sea  transport  include  the  possibility 
of  damage  through  contact  with  sea  water  or  with  the  moist  sea 
air  (as  in  the  case  of  leather  goods),  through  lateral  jars,  jolts 
and  knocks  due  to  a  heavy  sea,  injury  in  loading  on  board  ship 
and  unloading,  operations  which  even  in  well  equipped  ports  are 
connected  with  greater  risk  than  in  railway  transportation ; 
finally  pilfering,  carelessness  and  other  perils  due  to  the  lesser 
degree  of  liability  on  the  part  of  marine  carriers  as  compared 
with  land  carriers.  To  denote  that  a  packing  adequately  protects 
the  goods  from  such  perils,  we  speak  of  "seaworthy  packing." 

Seaworthy  packing  in  cases  means  the  use  of  cases  made  of 
strong  wood,  provided  with  iron  or  steel  hoops,  well  closed,  with 
zink  or  tin  lining  that  is  preferably  soldered  all  around,  or  with 
wax,  oil  or  tar  cloth  lining.  The  case  may  be  nailed  together, 
or  still  better  screwed  together.  The  sides  of  the  case  should  be 
dovetailed.  The  case  must  be  packed  tight,  so  that  the  goods 
cannot  settle  or  leave  vacant  spaces  within.  Bales  must  include 
several  envelopes,  one  of  which  at  least  should  be  fully  water- 


198  INTEENATIONAL  COMMERCE 

proof;  they  must  be  hooped  with  iron  or  steel  hoops,  and  these 
should  be  protected  against  rust.  Sometimes  the  whole  bale  is 
painted  to  heighten  its  water  resisting  qualities  (painted  cloth). 
The  goods  should  be  pressed  together  as  tightly  as  their  nature 
permits,  the  outside  hoops  should  be  drawn  together  tightly. 
Valuable  goods  shipped  in  sacks  are  placed  in  double  sacks. 
Cooperage  used  for  the  shipment  of  dry  articles  is  subject  to 
the  same  suggestions  as  are  laid  down  for  cases.  In  the  case  of 
some  liquids  shipped  to  tropical  countries  it  is  customary  to  pro- 
tect them  from  excessive  heat  by  placing  the  original  cask  into 
an  "overcask."  Similarly  it  is  customary  to  ship  kerosene  oil 
in  cases  containing  two  or  four  tins. 

With  regard  to  saving  freight  and  customs  charges  in  the 
choice  of  packing  it  is  to  some  extent  opposed  to  the  principle 
of  providing  the  maximum  of  protection  for  the  goods.  Freight 
charges  are  made  on  the  basis  of  the  weight  or  of  the  dimensions 
of  the  goods  including  the  packing,  customs  charges  are  levied 
(where  they  are  not  ad  valorem)  upon  the  gross  or  the  net 
weight  of  goods  (in  some  instance  upon  the  so-called  "legal" 
weight,  being  the  net  weight  plus  the  weight  of  the  immediate 
interior  wrapping). 

Where  the  freight  charges  are  levied  upon  the  weight  of  the 
goods,  and  the  customs  charges  upon  the  gross  weight,  or  on  the 
basis  of  a  fixed  deduction  for  the  packing,  the  tendency  will  be 
to  choose  a  light  packing.  Thus  the  goods  are  packed  in  bales 
instead  of  cases,  or  in  light  cases  instead  of  heavy  cases  and  a 
saving  is  effected,  but  on  the  other  hand  in  so  doing  the  shipper 
adopts  a  package  affording  less  security.  The  dimensions  of 
the  packing  may  be  lessened  by  cutting  down  the  mass  of  interior 
wrappings.  Whether  to  save  expense  or  to  afford  increased  pro- 
lection  to  the  goods,  the  question  must  be  decided  in  accordance 
with  the  character  of  the  goods  and  of  the  business.  Generally 
speaking,  the  more  valuable  the  goods,  the  more  attention  will 
be  paid  to  the  packing,  the  cheaper  the  goods  the  more  desirable 
will  it  be  to  save  expense.  At  any  rate  every  effort  must  be 
made  to  economize  in  freight  and  custom  duties,  provided  the 
safety  of  the  merchandise  is  not  jeopardised. 

Import  regulations  affecting  the  packing  problem  may  relate 
to  the  packing  itself  or  to  the  inscriptions  thereon.    Some  goods 


CONTRACTS  AND  STYLE  199 

may  be  admitted  either  exclusively  or  on  favored  terms  when 
shipped  in  a  specified  packing.  Inscriptions  on  packings  are  sub- 
ject to  regulations  in  many  countries  with  the  purpose  of  pro- 
tecting the  home  trade  from  unfair  competition.  The  ignoring 
of  these  regulations  may  lead  to  custom  fines  and  delay  in  de- 
livery. 

With  regard  to  shipment  from  the  port  of  delivery  to  ulti- 
mate destination  the  exporter  must  remember  that  transportation 
conditions  are  not  always  as  well  developed  overseas  as  in  the 
home  country;  it  costs  too  much  money  to  repack  the  goods  at 
the  port  of  delivery,  particularly  as  many  goods  are  subject  to 
deterioration  and  shrinkage  if  exposed  in  tropical  countries  The 
packing  must  correspond  with  the  conditions  of  further  forward- 
ing from  the  port  of  delivery.  In  some  cases  certain  weights 
and  dimensions  must  not  be  exceeded  for  individual  packages, 
and  the  shape  of  the  packages,  as  well  as  their  dimensions,  must 
be  suited  to  the  country  of  ultimate  destination  and  its  means 
of  transport.  Maximum  weights  for  transport  on  camel  back 
are  packages  of  250  to  260  lbs.,  for  mule  back  165  to  175  lbs., 
for  human  carriers  50  to  55  lbs.  If  the  goods  are  to  be  re-sold 
without  re-packing,  and  it  is  necessary  to  re-sell  them  by  sample, 
the  seller  should  ship  the  samples  in  a  separate  case.  He  is  ob- 
liged to  do  so  only  if  the  contract  specifically  calls  for  it  or 
where  commercial  usage  demands  it.  But  it  is  a  sensible  and 
paying  measure  and  it  calculated  to  lead  to  increased  sales  if 
followed. 

Particularly  important  for  the  re-sale  of  goods  in  original 
packing  is  the  choice  of  packing  in  accord  with  the  desires  and 
needs  of  ultimate  customers. 

6.     Contract  Obligations  Relating  to  Style  and  Make-Up. 

Under  style  or  make-up  we  understand  the  outer  form  given 
to  merchandise  without  affecting  its  properties  or  characteristics, 
taken  in  conjuction  with  its  immediate  wrapping  and  packing, 
if  it  figures  as  a  component  part  of  the  merchandise  as  a  sales 
object.  The  seller  may  put  out  his  merchandise  in  a  special 
form,  outfit  or  packaging,  in  order  to  promote  the  sale  thereof, 
or  to  increase  its  value  to  the  user ;   the  buyer  may  have  similar 


200  INTERNATIONAL  COMMERCE 

aims  with  regard  to  the  merchandise.  The  sales  contract  fre- 
quently contains  clauses  agreeing  to  a  certain  style  or  make-up 
of  the  goods. 

Among  the  numerous  varieties  of  such  clauses  may  be  men- 
tioned the  buyer's  demand  for  labels  of  a  certain  color  or  bear- 
ing the  maker's  trade-mark,  the  quantity  of  units  that  go  to  an 
individual  package,  the  form  of  bottles  and  bottle  caps,  etc.,  etc. 
The  make-up  of  the  goods  and  the  manner  of  their  packaging 
is  of  considerable  importance,  particularly  the  lower  the  level 
of  the  traders  is  to  whom  the  goods  are  finally  sold.  Backward 
nations  find  a  great  stimulus  in  making  their  purchases  on  the 
basis  of  attractively  made-up  goods  which  appeal  to  their 
taste,  often  paying  more  attention  to  this  external  feature  than 
to  the  quality  of  the  goods.  Such  buyers  also  show  an  attitude 
of  suspicion  towards  new  goods  and  look  for  accustomed  labels 
and  external  marks.  Middlemen  supplying  such  markets  must 
consider  this  attitude  of  their  ultimate  trade  and  insist  on  care- 
ful attention  to  such  details  from  their  source  of  supply. 

Failure  to  put  up  and  to  make  up  goods  as  agreed  in  the 
contract  has  the  force  of  a  quality  defect,  for  the  make-up  is  a 
component  part  of  the  article  of  merchandise  as  a  sales  object. 
The  object  of  the  contract  is  not  only  the  merchandise  itself,  but 
it  also  includes  all  the  externals  agreed  upon. 

Merchandise  made  up  or  put  up  at  variance  with  instruc- 
tions may  lose  in  value  to  the  purchaser,  even  if  the  style  fur- 
nished is  saleable  per  se.  The  buyer  might  desire  to  accustom 
his  trade  to  a  certain  outward  form  of  the  merchandise.  A 
different  make-up  may  be  entirely  useless  to  him.  The  buyer 
has  by  commercial  usage  the  right  to  refuse  to  accept  goods  put 
up  in  a  manner  conflicting  with  his  instructions. 


CHAPTER  XL 

7.     Contract  Performance. 

A.    The  Time  of  Performance. 

The  time  of  contract  performance  is  generally  speaking  the 
time  when  the  party  to  a  contract  accomplishes  those  acts  which 
mark  the  fulfilment  of  his  contractual  obligations. 

In  international  sales  contracts  the  performance  of  the  con- 
tractual obligations  on  the  part  of  the  vendor,  with  special  re- 
ference to  his  principal  duty,  consists  in  the  accomplishment  of 
all  acts  leading  to  the  surrender  to  the  buyer  of  the  right  to 
property  to  goods  and  of  their  possession,  as  intended  in  the  con- 
tract. 

The  time  of  the  performance  of  the  contract,  as  far  as  the 
vendor  is  concerned,  is  therefore  that  time  when  he  effects  those 
acts  which  place  the  object  of  the  sale  at  the  disposition  of  the 
buyer. 

As  a  rule  this  transfer  must  be  effected  to  the  buyer  imL 
mediately,  or  to  someone  authorized  by  the  buyer  to  take  pos- 
session. In  such  cases  the  passage  of  the  property  rights  and 
of  possession  is  clearly  established. 

The  goods,  however,  may  have  to  be  shipped  from  the  place 
of  sale  to  their  destination,  which  may  be  at  a  considerable  dist- 
ance from  the  place  of  sale,  and  must  be,  with  that  end  in  view, 
turned  over  to  third  parties  for  transportation.  Here  the  vendor 
performs  his  contractual  obligations  by  turning  over  the  goods 
to  the  transportation  organs,  and  while  the  goods  have  passed 
out  of  his  possession,  they  have  not  yet  come  into  the  possession 
of  the  buyer. 

In  the  case  that  the  goods  are  in  the  possession  of  a  third 
party,  being  warehoused  for  instance,  the  transfer  of  property 
rights  may  be  effected  by  the  declaration  of  the  original  owner 
that  they  are  henceforth  to  be  considered  the  property  of  the 
buyer. 


202  INTERNATIONAL  COMMERCE 

The  buyer  is  not  obliged  to  regard  such  a  declaration  as 
performance  of  the  contract,  unless  such  a  course  is  prescribed 
in  the  contract  or  is  current  commercial  usage. 

Such  surrenders  of  property  rights  are  effected  by  means 
of  warehouse  receipts,  warrants,  bills  of  lading,  etc.  Here  we 
must  examine  into  the  question  whether  such  surrenders  through 
a  declaration  or  other  documents  constitute  the  principal  act  in 
the  performance  of  the  contract  or  merely  a  supplementary  act. 
Very  frequently  the  latter  is  the  case  and  the  actual  turning  over 
of  the  merchandise  "bodily"  constitutes  the  principal  act. 

Thus  in  c.  i.  f.  contracts  for  the  supply  of  produce  shipped 
from  overseas  commercial  usage  regards  the  time  when  the  goods 
are  turned  over  to  the  freight  carrier  as  the  time  of  the  contract 
performance,  while  in  the  shipment  of  manufactured  products 
from  Europe  and  America  the  transfer  of  documents  to  a  bank 
against  acceptance  is  generally  an  act  supplementing  the  actual 
transfer  of  goods.  The  general  conditions  of  sale,  printed  on  the 
reverse  of  the  c.  i.  f.  and  c.  &  f.  contract  form  of  a  prominent 
American  steel  exporting  concern  read,  in  part,  as  follows: 
"The  tender  to  the  purchase  or  his  authorized  agent,  of  shipping 
documents,  consisting  of  proper  bills  of  lading,  and,  in  the  case 
of  c.  i.  f.  sales,  negotiable  insurance  certificates,  constitutes  full 
and  final  delivery  on  the  part  of  the  seller,  and  entitles  it  to  the 
immediate  payment  in  full  for  goods  shipped,  without  prejudice 
to  the  subsequent  adjustment  of  just  claims  on  the  part  of  the 
purchaser."  While  apparently  the  presentation  of  documents  to 
the  bank  forms  the  principal  act,  as  a  matter  of  fact  the  principal 
act  is  in  the  transfer  of  the  goods,  of  which  the  documents  are 
the  proof,  forming  thus  a  supplementary  act  in  the  transfer. 

In  some  classes  of  merchandise,  as,  for  instance,  in  the 
British  metal  trade,  the  transfer  of  certain  documents  consti- 
tutes performance  of  the  contract.  Here  so-called  "warrants" 
are  used  as  commercially  negotiable  and  transferable  documents 
and  form  an  object  of  trading  in  themselves.  The  material 
transfer  of  possession  of  the  goods  is  a  secondary  matter,  as 
both  the  quantity  and  the  quality  of  the  material  are  authorita- 
tively certified  in  the  warrants. 

The  time  of  performance  as  intended  by  the  contract  is  that 
time  when  the  contracting  party  is  bound  by  contractual  stipula- 


CONTRACT  PERFORMANCE :  TIME  80S 

tion  to  fulfil  his  obligations.  Since  the  place  where  this  is  done 
is  the  place  of  performance,  it  is  manifest  that  the  time  of  per- 
formance always  relates  to  acts  to  be  effected  at  the  place  of 
performance. 

Contractual  obligations  with  regard  to  delivery  may  be  ef- 
fected either  immediately  or  at  some  future  time.  This  permits 
the  grouping  of  deliveries  under  prompt  (immediate)  and  under 
future  deliveries. 

Where  the  contract  contains  the  obligation  on  the  part  of 
the  vendor  to  deliver,  and  on  the  part  of  the  buyer  to  accept,  at 
once,  respectively  within  a  few  days — which  in  commercial 
usage  is  regarded  as  equivalent  to  "at  once," — we  have  before 
us  a  mutually  prompt  transaction.  But  the  vendor  may  obligate 
himself  to  be  ready  to  furnish  the  merchandise  immediately  upon 
buyer's  call,  and  the  buyer  may  have  the  right  to  postpone  the 
exercise  of  his  call  until  some  period  either  stipulated  in  the  con- 
tract of  otherwise  agreed  upon,  but  in  any  case  within  a  rea- 
sonable time  after  the  sale ;  here  we  have  a  unilateral  obligation 
to  immediate  performance  which  is  binding  on  the  vendor  only. 

In  commercial  usage,  "prompt",  "at  once",  "soonest",  with- 
out delay",  "as  soon  as  possible",  "immediately"  and  similar 
stipulations  generally  permit  the  vendor  a  reasonable  time  to 
prepare  the  goods  for  shipment  and  to  put  them  underway.  This 
is  also  true  of  expressions  "ex  warehouse" ,  "ex  stock",  "spot." 
Commercial  usage  prescribes  the  interpretation  of  these  expres- 
sions for  various  markets  and  classes  of  merchandise,  indicating 
in  some  instances  the  next  business  day,  or  the  second  following 
business  day  as  the  time  of  the  contract  performance  within  the 
meaning  of  the  contracting  parties. 

Contracts  where  prompt  shipment  is  demanded,  or  where 
the  vendor  declares  that  the  goods  are  already  on  board  ship, 
are  instances  of  prompt  or  immediate  transactions,  provided  the 
place  of  shipment  is  regarded  in  the  contract  as  the  place  of  the 
contract  performance.  Where  the  destination  is  regarded  as  the 
place  of  the  contract  performance,  this  would  constitute  ship- 
ment for  delivery  in  the  future. 

It  is  customary  in  the  sale  of  goods  which  are  already  afloat 
to  regard  the  place  of  shipment  as  the  place  of  the  contract  per- 


204  INTEKNATIONAL  COMMEECE 

formance,  and  such  is  the  actual  commercial  usage  in  the  ship- 
ment of  products  from  overseas  to  Europe  and  America. 

In  the  shipment  of  produce  from  overseas  prompt  shipment 
is  frequently  insisted  on  in  the  contract,  or  indicated  by  the 
vendor's  declaration  that  the  merchandise  is  being  loaded,  or  is 
already  on  board  ship,  or  is  ready  to  be  loaded,  the  usual  way 

being  to  state  "shipping  or  to  be  shipped  by "  or  "Bills  of 

Lading  dated  or  to  be  dated "    Where  the  goods  are  sold 

while  "afloat,"  that  is  a  positive  declaration  that  the  merchan- 
dise has  been  loaded,  but  does  not  necessarily  mean  that  the 
ship  is  on  the  seas  bound  for  its  destination. 

In  sales  in  which  the  vendor  assumes  obligations  to  ship 
promptly  on  demand,  but  the  buyer  retains  the  right  to  ask  for 
the  goods  at  future  periods  without  being  charged  with  ware- 
housing expenses  or  demurrage,  we  have  really  a  modified  credit 
and  custody  contract.  Here  we  may  consider  that  as  soon  as 
the  vendor  has  declared  his  readiness  to  ship  he  has  performed 
his  part  of  the  contract  from  the  point  of  view  of  delivery  and 
acts  henceforth  as  a  custodian,  particularly  when  the  merchan- 
dise concerned  had  been  provided  with  the  buyer's  marks  and 
has  been  otherwise  individually  reserved  for  him.  In  these  cases 
the  risk  of  loss  from  fire  and  other  causes  is  borne  by  the  buyer 
and  he  forfeits  his  right  to  bring  up  future  claims  for  defects, 
still  further  proving  the  position  of  the  vendor  after  his  declara- 
tion of  readiness  to  ship  as  that  of  a  custodian  of  the  property 
of  the  buyer.  Thus  importers  in  Shanghai  give  their  Chinese 
customers  ninety  days  time  to  accept  goods  bought  by  them. 
After  the  lapse  of  ninety  days  they  charge  warehousing  charges 
and  demurrage.  The  customer  loses  the  right  to  bring  claims 
for  defects  two  weeks  after  the  arrival  of  the  goods.  Payment 
is  made  by  short  term  sight  drafts. 

This  custodianship  on  the  part  of  the  vendor  may  have  the 
purpose  of  giving  the  buyer  time  to  make  preparations  to  re- 
ceive the  goods  or  to  save  the  buyer  the  trouble  of  warehousing 
the  goods,  or  in  addition,  and  in  fact  in  most  cases,  to  provide 
a  security  to  the  vendor  for  already  incurred  obligations  of  the 
buyer.  This  is  particularly  true  of  cases  where  cash  payment 
on  acceptance  of  the  goods  is  stipulated. 


CONTRACT  PERFORMANCE:  TIME  205 

In  sales  for  future  delivery  the  time  of  the  performance  may 
be  indicated  in  the  contract  directly  or  indirectly. 

Indicated  directly,  the  time  of  performance  may  be  set  for 
some  definite  day,  as  the  first  of  the  month,  the  last  of  the  month, 
etc.,  or  a  period  may  be  stated  within  which  it  must  take  place, 
as  in  several  days,  weeks  or  months,  or  early  part,  latter  part  of 
the  month,  during  a  certain  season  of  the  year,  after  the  opening 
of  navigation,  after  the  harvest,  etc.  The  stipulation  of  the  per- 
formance on  a  stated  day  is  customary  in  the  banking  business. 
Indefinite  stipulations  as  "after  the  harvest,"  etc.,  may  mean 
through  commercial  usage  a  fairly  definite  period,  or  may  have 
the  intention  of  leaving  the  time  of  performance  within  indicated 
limits  to  the  good  faith  of  the  contracting  party.  In  German, 
French  and  British  commercial  usages,  the  courts  have  ruled 
that  in  sales  transactions  where  the  performance  is  stipulated  to 
take  place  on  a  certain  day,  dependent  upon  the  nature  of  the 
goods  and  the  intentions  of  the  contracting  parties,  the  buyer 
cannot  demand,  but  the  vendor  can  accomplish  performance  be- 
fore the  day  stipulated. 

Where  the  performance  is  stipulated  for  a  certain  day, 
similar  regulations  as  to  grace  are  usually  valid  as  in  commercial 
bills.  If  the  day  happens  to  be  a  public  holiday,  then  the  next 
business  day  is  regarded  as  the  day  of  performance,  excepting 
under  French  usage,  where  the  last  preceding  business  day  is 
the  legal  time  of  performance. 

Where  a  stated  period  is  stipulated  for  the  performance  of 
the  contract,  this  may  begin  on  a  fixed  date  or  be  contingent 
upon  certain  eventualities,  such  as  the  opening  of  the  navigation. 
It  ends  either  before  a  stated  date  or  within  indefinite  limits, 
but  even  in  the  latter  case  commercial  usage  and  good  faith 
prescribe  an  approximate  limit. 

Within  the  contractual  time  limit  for  performance  it  is  open 
either  to  the  vendor  (vendor's  choice  or  option),  or  to  the  buyer 
(buyer's  choice  or  option)  to  bring  about  the  performance  of  the 
contract  by  exercising  his  option.  The  vendor  exercises  his 
option  by  notifying  the  buyer,  the  buyer  by  sending  in  a  call  or 
demand  for  goods.  Where  the  merchandise  is  shipped  to  the 
buyer,  the  vendor's  exercise  of  his  option  is  generally  expressed 
in  the  fact  of  sending  the  invoice  to  the  buyer. 


206  INTERNATIONAL  COMMERCE 

As  a  rule  the  vendor,  when  ready  to  ship,  must  give  the 
buyer  suitable  time  to  accept  the  goods;  the  buyer,  when  he 
demands  the  goods,  must  give  the  vendor  suitable  time  to  pre- 
pare them  for  shipment.  Frequently  by  contract  stipulation, 
at  times  by  commercial  usage,  where  the  buyer  has  the  right  to 
demand  shipment,  or  when  upon  notice  from  the  vendor  he  must 
either  get  the  goods  or  issue  instructions  disposing  of  them,  this 
time  is  more  or  less  denned.  Here  we  must  distinguish  whether 
this  time  is  to  be  understood  in  the  sense  that  performance  must 
be  effected  at  its  expiration,  or  the  performance  may  be  effected 
at  any  time  within  the  period  indicated. 

In  shipments  of  produce  from  overseas  on  the  basis  of  fu- 
ture delivery,  the  contract  generally  stipulates  the  time  period 
within  which  (or  it  indicates  the  name  of  a  vessel  due  to  sail 
on  a  certain  day,  when)  the  shipment  must  be  finally  effected. 
Is  the  port  of  shipment  the  place  of  performance,  this  period 
marks  the  time  of  performance.  In  this  business  it  is  not  cus- 
tomary to  buy  on  call  exercised  by  the  buyer.  The  delivery 
time  is  expressed  by  words  "to  be  shipped  (or  "shipment")  dur- 
ing  ,  etc."    It  may  be  intended  that  by  the  expiration  of 

the  time  indicated  the  merchandise  must  be  turned  over  to  the 
carrier,  or  the  merchandise  must  be  loaded,  or  that  the  ship  must 
start  on  its  journey.  Several  European  associations  of  import- 
ers have  established  the  commercial  usage  of  defining  "load- 
ing", "clearance"  and  "sailing"  within  the  specified  period.  In 
all  business  from  overseas  the  vendor  must  in  good  time  indicate 
to  the  buyer  in  the  so-called  declaration  the  name  of  the  steamer 
and  the  captain,  the  markings  of  the  packages,  etc. 

The  performance  of  a  contract  split  into  partial  shipments 
to  be  effected  in  a  series  may  be  either  conditioned  upon  stated 
periods  or  optional.  In  the  first  case  it  is  customary  to  speak 
of  business  "on  call,"  (or  "on  demand"),  "on  successive  call  or 
demand",  "or  to  be  shipped  August,  September,  October,  Nov- 
ember successively  buyer's  option,"  or  "shipment  in  uniform 
quantities  every  month  until ..."  Partial  shipments  must  be 
provided  for  in  the  contract  or  based  on  commercial  usage, 
otherwise  the  seller  has  no  right  to  effect  them.  Sometimes, 
however,  the  nature  of  the  merchandise,  the  volume  of  the  order 
and  the  available  cargo  space  make  it  imperative,  for  instance, 


CONTRACT  PERFORMANCE :  TIME  207 

when  a  large  tonnage  of  steel  materials  is  sold  at  a  time  when 
shipping  space  to  a  certain  foreign  destination  is  available  only 
in  a  limited  measure. 

Delivery  contracts  in  the  strictest  sense,  called  also  time  bar- 
gains, refer  to  transactions  (as,  for  instance,  produce  exchange 
contracts  for  future  delivery)  where  the  vendor  assumes  a  strict- 
ly binding  obligation  to  deliver,  the  buyer  a  strictly  binding  ob- 
ligation to  accept,  at  a  specified  time,  against  the  vendor's  notice 
or  the  buyer's  demand. 

An  indirect  indication  of  the  time  of  contract  performance 
is  given  when  the  contract  stipulates  delivery  at  a  certain  time, 
but  this  does  not  refer  to  the  place  of  contract  performance  and 
is  not  therefore  in  itself  the  time  of  contract  performance.  The 
time  of  contract  performance  is  then  indirectly  deduced  from  the 
time  of  stipulated  delivery.  Indications  of  time  regarding  de- 
livery which  do  not  refer  to  the  place  of  contract  performance 
are  characteristic  of  contracts  which  indicate  the  time  when  the 
goods  must  be  shipped,  and  the  place  of  shipment  is  not  the 
place  of  contract  performance,  or  indicate  the  time  vdien  the 
goods  must  arrive  at  destination,  when  the  place  of  shipment  is 
the  place  of  contract  performance. 

The  indirect  indication  of  the  time  of  contract  performance 
is  customary  in  the  business  transactions  on  the  basis  of  arrival 
("to  arrive.  . .  .,"  or  "arrival  contracts").  These  generally  refer 
to  the  import  of  products  from  overseas,  where  the  performance 
of  the  contract  is  effected  after  arrival.  In  such  transactions  it 
is  customary  to  stipulate  a  definite  time  for  the  loading  of  the 
goods,  or  to  assume  that  loading  has  been  effected,  as  in  the 
case  of  sales  of  "goods  afloat,"  the  time  of  shipment  here  being 
an  already  determined  factor.  The  vendor  here  supplies  to  the 
buyer  first  the  usual  declaration,  giving  the  details  of  the  ship- 
ment, such  as  the  name  of  the  steamer,  marks  of  packages,  etc., 
and  later  submits  to  him  the  notice  of  arrival 

The  distinction  between  the  direct  and  the  indirect  indication 
of  the  time  of  performance  is  of  importance  in  determining  the 
question  of  the  timely  fulfilment  of  contractual  obligations.  The 
fact  that  the  vendor  has  failed  to  observe  the  time  stipulation 
does  not  necessarily  lead  to  the  conclusion  that  he  has  failed  to 
perform  his  contract.     It  is  first  necessary  to  inquire  into  the 


208  INTERNATIONAL  COMMERCE 

sense  and  intent  of  the  contractual  stipulations  with  regard  to 
the  time  of  performance.  For  an  example  we  may  take  a  con- 
tract with  an  oversea  vendor  specifying  "to  arrive."  The  con- 
tract stipulates  shipment  on  a  certain  day  with  a  certain  boat. 
If  the  vendor  fails  to  ship  on  the  stipulated  day  and  by  the  stipu- 
lated boat,  but  ships  shortly  afterwards  on  a  faster  vessel,  and 
the  performance  takes  place  at  the  destination  not  later  than  if 
it  had  been  shipped  as  stipulated,  no  liability  attaches  to  him ;  or 
in  the  case  of  the  shipment  of  manufactured  goods  from  Europe 
and  America  to  oversea  countries,  where  the  port  of  shipment 
is  generally  the  place  of  the  performance  of  the  contract,  if  it 
is  agreed  that  the  goods  are  to  reach  the  buyer  within  a  certain 
period,  it  means  only  that  the  shipper  must  use  due  diligence  in 
shipping  his  goods  in  proper  time.  Has  he  done  so,  and  later 
through  an  unforeseen  circumstance  the  arrival  of  the  shipment 
is  delayed,  he  is  not  liable  for  non-performance  or  belated  per- 
formance, unless  he  has  specifically  assumed  the  risk  of  delay  in 
transportation,  which  is  not  usual  in  international  sales  contracts. 

Default  is  the  culpable  failure  to  perform  an  obligation  when 
due,  and  in  commerce  also  the  culpable  failure  to  accept  the  per- 
formance of  an  obligation  in  due  time.  If  no  blame  is  attached 
to  the  obligated  party  for  failure  to  perform  the  obligation  in 
due  time,  no  default  exists.  If  a  specified  date  is  set  for  the 
performance,  failure  to  perform  usually  denotes  default. 

Commercial  usage  in  many  countries  provides  certain  regu- 
lations which  the  injured  party  must  observe  in  the  face  of 
failure  on  the  part  of  the  other  contracting  party  to  perform 
his  obligations  in  due  time.  So  in  some  produce  exchanges  and 
similar  boards  he  must  file  a  protest,  either  in  the  exchange  ad- 
ministration, or  before  a  court  or  a  notary,  or  undertake  other 
steps  to  determine  the  existence  of  a  default,  but  the  other  con- 
tracting party  must  be  in  any  event  notified. 

Either  of  the  contracting  parties  may  be  found  in  default  in 
various  ways.  The  most  common  example  of  default  on  the  part  of 
the  seller  is  in  the  failure  to  turn  over  the  goods  to  the  buyer 
in  due  time.  Where  the  merchandise  must  be  turned  over  to  a 
third  party  for  shipment  to  the  other  contracting  party,  the 
vendor  is  obliged  merely  to  turn  over  the  goods  to  the  freight 
forwarder  or  the  shipping  agent  in  due  time.    After  he  has  done 


CONTRACT  PERFORMANCE:  TIME  209 

so  he  cannot  be  in  default  on  account  of  failure  to  deliver  on 
time,  unless  through  his  power  of  disposition  he  hinders  the 
transfer  of  the  merchandise  to  the  buyer. 

Failure  to  effect  delivery  in  good  time  may  be  free  from 
default  on  the  part  of  the  vendor:  where  no  definite  time  of 
delivery  has  been  specified  and  the  buyer  has  not  made  a  demand 
on  the  vendor;  where  the  goods  are  sold  subject  to  call  or  de- 
mand, and  the  buyer  has  not  issued  a  call  or  demand  in  due 
time;  where  the  co-operation  of  the  buyer  is  necessary,  such  as 
furnishing  of  specifications,  issuance  of  shipping  instructions, 
providing  of  a  ship  in  cases  where  the  buyer  undertakes  to  fur- 
nish the  vessel,  the  vendor  is  not  in  default  if  the  buyer  has 
failed  to  do  his  part;  where  the  performance  is  contingent  on 
a  performance  by  the  buyer,  such  as  payment  in  advance,  pre- 
liminary payment,  provision  of  a  confirmed  credit  in  due  time; 
finally  when  the  vendor  is  prevented  from  performance  by  cir- 
cumstances beyond  his  power,  as  force  majeure,  including  so- 
called  acts  of  God,  strikes,  acts  of  government,  state  of  war, 
acts  of  enemies.  Many  sales  conditions  and  contracts  specifically 
exempt  these. circumstances,  either  enumerating  them  in  detail  or 
referring  to  them  as  circumstances  beyond  the  vendor's  control. 
Commercial  usage  demands  that  the  vendor  carry  out  his  ob- 
ligations without  loss  of  time  as  soon  as  the  unusual  circum- 
stances which  have  prevented  him  from  the  performance  of  con- 
tract are  removed.  And  the  buyer  is  obliged  to  accept  this  latter 
performance.  However,  commercial  usage  places  a  reasonable 
time  limit  upon  such  obligations. 

The  buyer  may  be  in  default  in  failing  to  accept  the  goods 
which  the  vendor  in  accordance  with  the  contract  has  ready  for 
him  and  offers  to  him.  He  may  be  in  default  by  failure  to  pro- 
vide payment,  if  it  is  due  and  he  has  culpably  failed  to  provide 
it.  This  happens  in  cases  where  the  buyer  obligates  himself  to 
pay  for  the  goods  on  or  before  arrival  at  destination. 

When  the  vendor  is  in  default,  the  buyer  has  the  right  either 
to  demand  subsequent  performance  with  or  without  a  claim  for 
damages,  or  he  may  sue  for  damages  because  of  non-perform- 
ance, or  he  may  cancel  the  contract  altogether.  If  the  buyer  is 
in  default,  the  seller  has  the  right  according  to  the  laws  of  many 
countries  to  warehouse  the  goods  at  the  expense  of  the  buyer, 


210  INTERNATIONAL  COMMERCE 

to  sue  for  acceptance  or  to  demand  damages.  When  either 
party  become  insolvent,  the  laws  of  the  place  of  contract  con- 
clusion prevail  with  regard  to  the  completion  of  the  contract. 

Differences  between  vendors  and  buyers  with  regard  to  per- 
formance in  due  time  on  either  part  occur  often,  without  either 
party  adopting  measures  that  may  be  within  their  legal  rights. 
Commerce  generally  abhors  litigation,  particularly  in  interna- 
tional transactions,  and  though  the  injured  party  is  greatly  in- 
convenienced, the  common  solution  of  a  situation  in  which  one 
party  appears  in  default  is  to  extend  the  time  limit  set  in  the  con- 
tract. It  may  be  stated,  however,  that  lack  of  promptness  in 
meeting  obligations,  whether  to  ship  or  to  accept  on  time,  leads 
to  loss  of  business,  for  the  injured  party  is  likely  to  suffer  con- 
siderable loss  and  great  disadvantage  through  the  failure  on  the 
part  of  the  other  contracting  party  to  perform  his  obligations  in 
due  time. 

In  international  relations  it  is  too  difficult  to  come  to  an 
amicable  and  equitable  understanding  with  regard  to  losses  so 
suffered,  and  competition  is  too  keen  to  permit  a  defaulting 
vendor  to  retain  his  customer's  business  or  a  defaulting  buyer 
to  maintain  his  credit  standing. 

B.    The  Place  of  Performance. 

The  contractual  place  of  performance  is  that  place  where 
parties  to  a  contract  assuming  obligations  must  effect  those  acts 
which  mark  the  accomplishment  of  their  obligations.  Thus  the 
place  of  performance  with  regard  to  the  delivery  of  goods  sold 
is  that  place  where  the  vendor  effects  those  acts  which  mark 
the  accomplishment  of  the  transfer  of  goods  from  his  possession 
into  the  possession  of  the  buyer. 

This  definition  explains  the  importance  of  the  determination 
of  the  question  which  is  the  place  of  the  contract  performance 
in  sales  transactions.  This  point  is  essential  in  connection  with 
the  question  whether  the  vendor  has  duly  carried  out  his  obliga- 
tions under  the  contract.  It  is  also  of  great  importance  as  re- 
gards the  obligations  of  the  buyer  towards  the  vendor.  The  idea 
of  the  time  of  performance  is  closely  connected  with  the  place 
of  performance.     It  is  at  the  place  of  performance   that  the 


CONTRACT  PERFORMANCE :  PLACE  2 1 1 

goods  must  show  those  elements  of  quality  and  quantity  which 
Are  stipulated  in  the  contract. 

From  the  place  of  the  performance  on  the  risk  falls  upon 
the  shoulders  of  the  buyer.  In  case  of  doubt,  the  calculation  of 
the  value  of  the  goods  is  based  upon  the  quantity  and  dimen- 
sions and  other  measurements  the  merchandise  possessed  at  the 
time  of  the  performance  in  the  place  of  performance.  Inter- 
national law  in  cases  of  conflict  of  laws  favors  the  lex  loci  con- 
tractus, the  law  of  the  place  of  contract  performance  as  deter- 
mining the  jurisdiction. 

The  place  of  performance  may  be  specifically  named  in  the 
contract.  Or  it  may  be  indirectly  deduced  from  the  contract  on 
the  basis  of  commercial  usage.  In  many  countries  the  law  pro- 
vides that  the  place  of  performance  is  that  place  where  the  party 
obligated  maintains  his  business  domicile,  and  only  when  the 
merchandise  at  the  time  of  the  conclusion  of  the  contract  is 
located  at  another  place,  and  this  fact  is  known  to  both  contract- 
ing parties,  is  the  latter  considered  the  place  of  performance. 

In  deducing  the  place  of  performance  from  the  contract 
where  it  is  not  directly  named,  one  must  consider  to  what  point 
the  vendor  bears  the  risk  of  transportation,  where  the  authori- 
tative determination  of  the  quantity  and  the  quality  of  the  goods 
takes  place,  whence  the  cost  of  transportation  is  charged  to  the 
buyer,  whether  the  goods  are  not  only  to  be  delivered  by  the 
vendor  but  also  installed  and  mounted.  In  all  these  points,  or 
if  the  fifth  point  is  not  in  question,  where  the  first  four  points 
coincide  we  have  the  place  of  performance. 

The  declaration  that  the  vendor  will  assume  the  cost  of  trans- 
portation to  a  certain  point  does  not  yet  make  that  point  the 
place  of  performance,  though  in  certain  places  and  for  certain 
merchandise  the  quoting  of  prices  "f.o.b."  certain  points  makes 
the  latter  the  place  of  performance.  It  is,  however,  generally 
intended  to  indicate  by  "f.o.b."  that  freight  charges  up  to  that 
point  are  assumed  by  the  vendor. 

It  is  in  the  interest  of  the  buyer  to  seek  to  make  the  place 
of  performance  at  the  place  where  his  business  is  domiciled,  or 
in  case  he  has  sold  to  his  own  customer  elsewhere,  at  the  domi- 
cile of  his  customer.  But  it  is  in  the  interest  of  the  vendor  to 
choose  as  the  place  of  performance  the  place  where  the  goods 


212  INTERNATIONAL  COMMERCE 

are  located  at  the  time  of  the  conclusion  of  business,  or  if  they 
are  to  be  manufactured,  at  his  factory. 

In  view  of  the  importance  of  determining  the  place  of  per- 
formance this  should  be  clearly  specified  in  a  contract. 

C.    Delivery. 

Under  delivery  we  understand  the  sum  total  of  those  acts 
which  the  vendor  must  accomplish  in  order  to  put  the  goods 
at  the  disposal  of  the  buyer  or  of  a  person  authorized  by  the 
buyer  to  accept  the  goods  at  the  place  of  destination,  terminating 
the  vendor's  principal  obligation. 

The  place  of  delivery  is  generally  the  contractually  stipu- 
lated place  of  the  destination  of  the  goods.  It  is  the  place  where 
the  buyer  desires  to  attain  the  aim  of  the  contract  with  regard 
to  the  merchandise  bought  by  him,  inasfar  as  he  has  indicated 
this  aim  in  the  contract  and  stipulated  it  in  a  contract  clause. 
The  place  of  destination  is  distinct  from  the  place  of  delivery 
if  the  buyer  declares  his  desire  to  use  the  goods  at  a  point  dif- 
ferent from  where  the  delivery  takes  place,  as  for  instance  when 
a  manufacturer  located  in  Pittsburgh  declares  his  willingness  to 
accept  in  New  York  a  shipment  of  raw  products  from  South 
America. 

If  the  merchandise  before  delivery  is  not  at  the  place  of  de- 
livery, the  vendor  is  obliged  to  transport  it  to  the  place  of  de- 
livery. Where  no  specific  place  of  delivery  is  stipulated  in  the 
contract,  commercial  usage  provides  that  the  vendor  must  send 
the  goods  to  the  buyer's  business  domicile,  in  order  to  enable 
him  to  accept  the  goods  there. 

The  buyer  has  the  right  to  send  subsequent  instructions  to 
the  vendor  even  such  as  are  not  contained  in  the  contract,  with 
regard  to  the  manner  of  shipment,  or  provided  these  instructions 
are  not  burdensome.  The  seller  must  follow  these  instructions, 
whether  contained  in  the  contract  or  not,  provided  no  urgent 
necessity  exists  for  deviating  from  them.  If  the  buyer  has  not 
chosen  to  indicate  the  method  of  shipment,  commercial  usage 
provides  that  the  vendor  shall  use  ordinary  commercial  diligence 
and  prudence  in  selecting  the  method  of  shipment. 

Delivery  includes  packing  the  goods,  selecting  the  time  of 


CONTBACT  PERFORMANCE:  DELIVERY  813 

shipment  (with  regard  to  possible  local  embargoes  or  traffic  dif- 
ficulties), the  preparation  of  shipping  documents,  Bills  of  Lad- 
ing, certificates,  declarations,  consular  invoices  where  necessary, 
choice  of  freight  forwarders  (unless  indicated  by  the  buyer), 
issuing  instructions  to  freight  forwarders,  directions  with  re- 
gard to  warehousing,  trucking,  transportation,  etc.  Apart  from 
contractual  obligations  and  commercial  usage,  the  vendor's  com- 
mercial sagacity  will  lead  him  to  be  very  thorough  and  careful 
in  providing  for  a  faultless  delivery,  as  any  negligence  or  mistake 
leads  to  claims,  dissatisfaction,  loss  of  trade,  etc.,  and  even  to 
liability  for  default  in  the  performance  of  the  contract. 

The  risk  of  loss,  shortage  and  deterioration.  The  risks  to 
which  merchandise  is  subject  include  in  the  first  instance  the 
danger  of  deterioration,  shortage  and  total  loss.  Deterioration 
may  be  due  to  inner  causes  or  also  to  outer  causes,  such  as  fire, 
water,  breakage.  The  deterioration  may  lead  to  partial  or  to 
total  depreciation.  Shortage  may  mean  also  a  depreciation  of 
the  value  of  the  total  merchandise.  Accidents  or  violence  may 
lead  to  total  loss.  Fire,  floods,  etc.,  are  instances  of  the  accidents 
leading  to  total  loss,  risks  of  war,  confiscation  by  enemies  or 
destruction  by  the  enemy  are  instances  of  violence  leading  to 
total  loss. 

Other  risks  include  extraordinary  expenditures  required  to 
preserve  the  shipment,  as  partial  landing  in  the  case  of  accidents 
to  a  ship,  repairs  to  packing,  manipulations  necessary  to  save 
the  goods,  such  as  repainting,  etc.,  running  into  a  port  in  the 
case  of  emergency. 

When  the  goods  are  turned  over  to  the  freight  forwarding 
agency  the  risk  is  as  a  rule  borne  by  the  buyer.  According  to 
the  English  law  it  is  not  necessary  to  turn  over  the  goods  to  the 
buyer  in  order  to  vest  the  right  of  property  in  him.  This  passes 
to  the  buyer  in  principle  on  the  conclusion  of  the  contract. 

Contractual  stipulations  and  commercial  usage  frequently 
make  special  provisions  for  shifting  all  or  part  of  the  risk  to 
which  the  merchandise  is  subject  from  the  shoulders  of  one  party 
to  those  of  another. 


CHAPTER  XII.     ' 
8.    The  Price  and  the  Technique  of  Price  Calculation. 
A.    The  Meaning  of  Price. 

As  a  rule  the  sales  contract  in  international  commerce  cites 
c.  definite  price  which  forms  the  basis  of  the  performance  of  the 
contract. 

The  price  can  cover  the  entire  contract,  though  it  stipulate 
a  supply  of  merchandise  of  various  classes,  qualities  and  di- 
mensions. This  is  known  as  a  lump  price,  or  a  blanket  price. 
Or  the  price  may  refer  to  individual  units  of  the  merchandise 
referred  to  in  the  contract.  This  is  known  as  a  unit  price.  The 
last-named  method  predominates  in  international  sales  contracts. 

Whether  the  contract  specifically  names  the  exact  qualities 
and  dimensions  of  the  goods  which  are  to  be  furnished,  or  grants 
to  either  contracting  party  the  right  of  later  specification  and 
merely  indicates  the  quantity  and  the  general  class  of  the  goods, 
it  may  either  state  a  fixed  and  definite  price  for  each  quality, 
or  an  average  price  which  is  to  be  applied  to  all  qualities,  or  a 
basic  price.  The  latter,  the  basic,  or  the  base  price  is  understood 
for  a  certain  quality  or  dimension  and  prices  for  other  qualities 
and  dimensions  are  figured  from  it  by  means  of  extras  added 
or  allowances  deducted.  Finally  in  goods  which  are  differentiated 
by  percentage  contents  a  price  per  quality  unit  may  be  agreed 
upon. 

The  base  price  is  generally  the  price  for  the  most  current 
quality  or  dimension  of  a  merchandise,  the  production  of  which 
is  effected  at  a  standard  cost.  This  is  the  custom  in  the  general 
run  of  iron  and  steel  products,  and  the  extras  for  unusual  di- 
mensions, special  packings,  more  expensive  finishes,  etc.,  are 
generally  so  figured  that  the  extra  list  remains  unchanged  for 
prolonged  periods,  while  the  base  price  is  permitted  to  fluctuate 
in  accordance  with  the  market.  Moreover  it  is  customary  for 
the  list  of  extras  to  be  practically  the  same  for  most  producers 


TECHNIQUE  OF  PRICING  215 

in  the  same  line;  thus  most  American  steel  mills,  for  instance, 
maintain  the  same  lists  of  extras.  When,  however,  increased 
costs  of  packing  materials,  or  of  auxiliary  products,  such  as  tin 
or  zink,  or  of  labor,  etc.,  make  it  imperative  to  issue  a  new  list 
of  extras,  notice  is  generally  sent  to  the  trade,  and  a  new  stand- 
ard list  of  extras  goes  into  effect.  It  is  customary  to  mention 
in  the  sales  contracts  the  list  of  extras  which  is  to  apply. 

Sometimes  it  is  customary  in  the  case  of  a  series  of  qualities 
or  of  dimensions  each  a  grade  higher  than  the  preceding,  to  state 
a  definite  difference  to  be  added  for  each  succeeding  grade  or 
dimension. 

In  the  case  of  unit  prices  based  on  quality  contents  (as  in 
raw  sugar,  in  iron  ore  based  on  content,  in  yarns  sold  by  quality 
number,  etc.),  the  price  of  the  merchandise  is  figured  by  multi- 
plying the  quality  unit  price  with  the  content  percentage.  If, 
for  instance,  the  price  is  $1.00  per  ton  and  i%,  then  if  the 
merchandise  shows  a  content  of  45%,  the  price  is  $45.00  per  ton. 

Only  rarely  when  the  contract  is  concluded  no  definite 
price  is  named,  but  it  is  agreed  that  a  price  to  be  fixed  later  (at 
a  time  generally  indicated  by  a  notice  given  by  one  or  both  con- 
tracting parties)  is  to  prevail,  being,  as  a  rule  based  upon  a  price 
rulling  in  a  given  market  at  that  time,  or  on  the  average  mar- 
ket rate  for  the  preceding  month.  Thus  in  Italy  silk  cocoons 
are  bought  on  the  basis  of  averaging  the  prices  prevailing  at  the 
time  of  shipment  in  the  principal  markets.  Metals  on  the  con- 
tinent of  Europe  are  bought  based  on  the  average  of  London 
Metal  Exchange  prices  during  the  month  preceding  delivery. 

Frequently  the  price  indicated  in  the  contract  (not  referring 
to  quality  differences)  is  conditioned  upon  fluctuations  in  the 
market,  or  other  eventualities  such  as  new  customs  laws,  in- 
creased cost  of  production,  etc.  The  change  in  the  contract 
price  may  take  place  automatically  with  any  change  in  the  mar- 
ket, or  a  limit  may  be  set  beyond  which  the  market  price  may 
fluctuate  before  the  change  affects  the  contract  price,  the  mar- 
ket changes  may  be  in  one  or  in  both  directions,  in  favor  of  one 
or  of  either  contracting  party,  or  the  contract  may  provide  that 
in  certain  eventualities  one  of  the  contracting  parties  may  de- 
mand a  revision  of  the  contract.     This  is  what  is  known  as  the 


216  INTERNATIONAL  COMMERCE 

fluctuation  clause  of  contracts.  It  is  usual  in  contracts  for  future 
delivery  spread  out  over  long  periods,  or  in  the  case  of  goods 
which  are  dominated  by  market  conditions  on  certain  days,  so 
that  prices  are  quoted  subject  to  the  alterations  of  the  next  mar- 
ket day. 

B.    The  Quotation. 
a)     The  Meaning  of  Quotation. 

Pricing  the  merchandise  is  that  technical  commercial  pro- 
cess by  which  its  exchange  value  is  expressed.  That  expression 
is  the  price.  The  communication  by  the  vendor  to  the  buyer  of 
the  price  set  by  the  vendor  upon  the  goods  desired  by  the  buyer 
or  offered  to  the  buyer  is  called  a  quotation.  The  price  is  quoted 
by  the  vendor  to  the  buyer. 

The  price  itself,  or  the  quotation,  is  the  proportion  between 
quantity  units  of  the  merchandise  and  the  quantity  units  of  the 
exchange  medium — money — that  is  to  be  given  for  it.  The  mode 
of  pricing  or  of  quoting  is  thus  primarily  a  method  expressing 
the  proportion  between  merchandise  and  money.  But  as  current 
in  commerce,  particularly  in  international  commerce,  the  quota- 
tion, or  the  price,  only  rarely,  if  ever  expresses  the  accurate  ex- 
change value  of  merchandise.  On  the  one  hand,  the  price  or  the 
quotation  may  be  subject  either  to  extras  or  to  deductions,  on  the 
other  hand  the  price  mostly  includes  that  re-imbursement  by  the 
buyer  in  favor  of  the  vendor  which  is  given  for  such  benefits 
as  the  postponement  of  payment  (credit)  or  for  the  assumption 
of  the  costs  of  transfer.  Only  when  we  duly  consider  such 
extras  and  deductions  on  the  one  hand,  and  the  elements  of  re- 
imbursement of  the  vendor  by  the  buyer  which  affect  the  quota- 
tion in  addition  to  the  schematic  basis  of  pricing — which  is  the 
method  for  arriving  at  the  correct  proportion  between  merchan- 
dise and  money — can  we  correctly  estimate  the  exchange  value 
of  merchandise  as  expressed  in  the  quotation. 

In  the  following  we  will  discuss  those  conditions  which  af- 
fect the  price  of  merchandise  without  referring  to  its  actual  ex- 
change value,  in  other  words  that  influence  which  is  based  upon 
the  technique  of  quotations  and  prices  as  current  in  international 
commerce,  taking  up  for  consideration  the  price  basis  and  allow- 


TECHNIQUE  OF  PRICING  217 

ances  other  than  discounts  and  rebates,  the  price  denomination, 
the  time  basis  of  price  calculation,  rebates  and  discounts,  and 
the  costs  of  transportation,  insurance  and  incidentals  as  included 
in  the  quotation. 

b)     The  Price  Basis  and  Allowances  Relating  to  the  Quantity 
and  the  Quality  of  the  Goods. 

The  price  basis  is  the  fixed  element  in  the  proportion  through 
which  the  value  of  the  merchandise  exchanged  towards  the  value 
of  the  exchange  medium  is  expressed.  The  price  basis  is 
usually  formed  by  a  so-called  unit  of  price,  being  a  definite  quan- 
tity of  merchandise,  as  I  yard,  i  ton,  I  dozen.  This  is  the  direct 
method  of  pricing.  In  certain  undeveloped  phases  of  commerce, 
and  in  some  instances  in  the  retail  trade,  the  money  quantity 
forms  the  price  basis  and  the  merchandise  quantity  alters  in  re- 
lation to  it,  as  for  instance  in  some  markets  eggs  are  sold  on 
the  basis  of  so  many  eggs  to  the  money  unit  of  the  country,  and 
grain  is  sold  in  some  parts  of  India  by  indicating  the  quantity 
that  goes  to  a  rupee.  This  is  the  indirect  method  of  pricing  and 
is  rarely  used  in  commerce. 

Of  some  importance  to  pricing  is  the  stipulation  where, 
when  and  how  the  correct  measuring  of  the  merchandise  must 
be  effected  in  order  to  arrive  at  the  value. 

As  a  rule  the  authoritative  measurement  is  that  which  is  de- 
termined at  the  time  of  contract  performance  and  at  the  place 
of  contract  performance.  But  in  international  sales  it  is  fre- 
quently the  rule  that  where  the  place  of  shipment  is  the  place 
of  contract  performance,  occasionally  the  measurements  deter- 
mined at  the  place  of  destination  prevail,  or  else  the  vendor  as- 
sumes the  guarantee  that  the  quantity  of  merchandise  as  de- 
livered at  destination  shall  be  in  accord  with  the  invoiced  quan- 
tity, or  the  quantity  determined  at  the  place  of  contract  per- 
formance up  to  a  certain  point  known  as  tolerance,  otherwise  the 
vendor  binds  himself  to  re-imburse  the  buyer  for  the  shortage. 
This  is  known  as  the  quantity  or  weight  guarantee,  and  has  the 
same  effect  as  determining  the  quantity  at  the  place  of  destina- 
tion. Through  such  an  agreement  the  vendor  relieves  the  buyer 
of  the  risk  as  to  quantity  during  transportation. 


218  INTEENATIONAL  COMMERCE 

In  the  case  of  some  merchandise  under  such  an  agreement 
the  vendor  runs  not  only  the  risk  of  loss  in  quantity  due  to  the 
perils  of  transportation,  but  also  due  to  natural  loss  of  quantity 
during  transportation.  Thus  skins  lose  weight,  woods  shrink  in 
dimensions,  fluids  suffer  diminution  through  evaporation.  Weight 
accretions  through  climatic  conditions,  such  as  dampness,  or 
through  accidental  causes,  as  an  influx  of  water,  would  work 
to  the  detriment  of  the  buyer  if  the  quantity  is  determined  at 
the  place  of  destination.  Therefore  in  hygroscopic  merchandise 
it  is  customary  to  agree  upon  a  certain  maximum  of  humidity 
content  on  which  valuation  must  be  based,  or  an  allowance  is 
stipulated  for  extraordinary  exposure  to  moisture  as  the  result 
of  transportation  perils.  Such  allowance  is  as  a  rule  determined 
by  arbitration.  The  measurements  determined  at  the  point  of 
shipment  are  known  as  "shipping  weights  or  measurements," 
those  determined  at  the  point  of  destination  as  "arrival  or  un- 
loading or  delivered  weights  and  measurements." 

The  time  when  the  measurements  are  effected  is  of  import- 
ance particularly  in  the  case  of  goods  which  suffer  loss  or 
shrinkage  in  the  course  of  time.  This  may  occur  during  trans- 
portation or  during  warehousing,  or  during  processes  of  im- 
provement such  as  finishing,  cleaning,  assorting,  bleaching,  etc. 
Or  losses  may  occur  on  the  spot  through  damage  to  packing  or 
through  manipulation  in  the  warehouse.  Therefore  in  the  case  of 
goods  sold  on  the  basis  of  warrants  ex-warehouse  it  is  important 
to  ascertain  whether  the  measurements  determined  at  the  time 
of  depositing  in  the  warehouse  shall  prevail,  or  the  goods  must 
be  subjected  to  an  additional  "re-weighing"  process,  in  order  to 
value  them. 

With  regard  to  measuring  the  goods,  it  is  customary  to  use 
official  scales,  standard  measuring  methods,  in  many  instances 
round  figures,  in  others  to  base  the  measurement  of  the  total 
merchandise  on  the  basis  of  averages.  These  methods  of  meas- 
urement were  discussed  when  we  considered  the  process  of  de- 
termining the  quantity  of  merchandise  as  an  element  of  the 
sales  contract. 

With  regard  to  determining  measurement  allowances,  the 
following  points  must  be  borne  in  mind : 

The  weight  of  merchandise  may  be  the  gross  or  the  net 


TECHNIQUE  OF  PRICING  219 

weight.  The  gross  weight  includes  the  weight  of  the  merchan- 
dise and  the  weight  of  the  packing.  The  net  weight  is  the  weight 
of  the  merchandise  without  the  packing.  This  is  not  always 
the  true  weight  of  the  merchandise,  for  it  may  include  admix- 
tures,  or  the  immediate  packaging.  In  Latin- American  usage  it 
is  customary  to  distinguish  the  "legal"  weight  as  weight  of  mer- 
chandise minus  the  outer  and  plus  the  inner  packing.  In  some 
markets  the  actual  net  weight  of  the  merchandise  is  referred  to 
as  net-net  weight. 

By  deducting  the  weight  of  the  packing,  the  tare,  from 
the  weight  of  the  shipment,  we  get  the  net  weight  of  the  mer- 
chandise as  used  commercially  for  price  purposes.  But  where 
the  usage  is  to  make  further  deductions  besides  the  tare  from 
the  gross  weight,  then  the  ultimate  remaining  weight  is  con- 
sidered the  net  weight.  Apart  from  this,  the  mere  method  of 
figuring  the  weight  shows  that  the  net  weight  as  basis  for  calcu- 
lations is  not  always  the  actual  net  weight  of  the  merchandise. 

Price  calculations  in  the  case  of  goods  sold  by  weight  gen- 
nerally  are  based  upon  the  net  weight,  or  the  weight  arrived  at 
after  all  the  customary  deductions  as  per  invoice.  In  a  few 
lines  of  merchandise,  however,  where  the  outer  packing  cannot 
be  conveniently  separated  from  the  merchandise,  or  where  the 
packing  and  the  merchandise  are  of  approximately  equal  value, 
merchandise  is  sold  on  the  basis  of  "gross  for  net,"  which  means 
that  the  gross  weight  is  taken  to  be  equivalent  to  the  net  weight 
for  purposes  of  calculation. 

Where  the  tare  is  figured  by  actual  weighing  of  the  pack- 
ing, it  is  called  the  actual  or  the  true  tare.  The  weighing  of  the 
packages  may  be  effected  by  weighing  all  of  the  packages  in  a 
shipment,  when  it  is  known  as  the  clear  tare,  or  net  tare,  or  a 
portion  of  the  packages  may  be  weighed  and  an  average  arrived 
at  which  is  to  be  multiplied  by  the  number  of  packages.  This 
average  tare  is  determined  in  accordance  with  commercial  usage, 
which  provides  for  the  proportion  of  the  tare  weighed  to  the 
tare  of  the  entire  shipment.  A  frequent  practice  is  to  weigh  10%. 

Furthermore  the  degree  of  exactness  with  which  the  tare  is 
determined  is  also  of  importance.  In  many  instances  the  prac- 
tice is  to  use  round  figures,  rounding  up  in  the  upward  direction, 


220  INTEENATIONAL  COMMERCE 

which  sometimes  effects  a  material  price  reduction  in  favor  or 
the  buyer.  In  Amsterdam  it  is  the  practice  in  figuring  the  aver- 
age tare  to  round  up  by  figuring  each  fraction  as  Yz  kilogram 
higher. 

The  clear  or  net  tare  can  be  best  determined  where  the 
goods  are  originally  packed  or  where  they  are  re-packed.  For 
this  reason  the  clear  tare  is  generally  determined  in  such  places. 
The  tare  determined  in  the  place  of  origin  is  known  as  the  ori- 
ginal tare.  If  at  destination  it  is  figured  in  another  measuring 
system  on  the  basis  of  converting  tables  it  is  known  as  converted 
tare. 

Where  it  is  not  customary  to  unpack  goods  at  once  on  ar- 
rival at  destination,  it  is  customary  to  determine  the  average 
tare  in  order  to  control  the  calculation  of  the  tare. 

Obviously  the  tare  thus  determined  seldom  fully  coincides 
with  the  invoiced  tare.  Such  differences  are  adjusted  either  by 
commercial  usage  or  by  special  agreements,  determining  to  what 
extent  such  divergences,  if  against  the  interest  of  the  buyer,  are 
to  be  tolerated.  If  the  difference  is  considrable  and  the  vendor 
does  not  approve  the  average  tare  findings  of  the  buyer,  it  is 
necessary  to  arrive  at  the  exact  clear,  or  actual  tare.  The  actual 
tare  arrived  at  here  may  be  still  more  divergent  from  the  invoiced 
tare.  The  packing  may  have  attracted  or  absorbed  moisture 
and  become  heavier.  In  the  case  of  fatty  or  pasty  goods  par- 
ticles of  merchandise  may  adhere  to  wrapping,  greatly  increas- 
ing its  weight.  Such  natural  causes  of  tare  difference  do  not 
entitle  the  buyer  to  re-imbursement.  If  the  determined  differ- 
ence apart  from  such  natural  causes  exceeds  the  allowance  limit 
established  by  commercial  usage  or  contract,  the  vendor  bears 
the  costs  of  the  tare  verification,  otherwise  the  buyer.  The  tare 
determined  or  corrected  at  the  point  of  destination  is  termed  the 
verified  tare. 

Where  the  tare  is  not  determined  for  each  shipment,  but  a 
standard  weight  is  assumed  by  usage,  it  is  called  usual  tare. 
If  it  is  based  on  a  certain  weight  per  package  it  is  called  unit 
tare,  if  it  is  based  on  a  percentage  relation  to  the  gross  weight 
it  is  called  percentage  tare.  As  a  rule  the  usual  tare  corresponds 
to  that  average  weight  of  a  specified  mode  of  packing  used  for 
specified  merchandise  which  has  been  arrived  at  through  ex- 


TECHNIQUE  OF  PRICING  821 

perience.  Or  it  may  be  intentionally  put  a  little  higher,  in  order 
to  favor  the  buyer.  If  the  actual  tare  is  considerably  higher 
than  the  usual  tare,  the  buyer  has  a  right  for  indemnification. 

The  customs  tare  is  that  calculation  of  the  tare  which  is 
arbitrarily  fixed  by  customs  regulation.  This  practice  is  pre- 
valent in  many  oversea  countries. 

Next  to  the  tare  allowance,  the  principal  weight  allowance 
is  the  so-called  draft  allozvance.  Draft,  or  overweight  allow- 
ance, is  an  indemnification  received  by  the  buyer  for  weight 
losses  sustained  in  re-packing  or  assorting,  or  through  the  de- 
terioration of  merchandise  or  through  weight  shrinkage  of  nor- 
mal character,  as  through  drying.  Such  draft  allowances  are 
regulated  by  local  commercial  usage  and  are  generally  figured 
in  the  invoice.  Since  this  is  done,  the  allowances  are  made 
whether  losses  are  actually  sustained  or  not,  and  the  foregoing 
explanation  refers  only  to  the  origin  of  the  custom. 

These  allowances  can  be  made  in  two  forms.  Either  the 
buyer  receives  an  overweight  in  addition  to  the  quantity  of  mer- 
chandise stipulated  in  the  contract,  or  a  deduction  is  made  from 
the  invoiced  amount  or  weight.  The  first  is  illustrated  by  the 
practice  of  adding  2%  overweight  in  addition  to  the  invoiced 
weight  in  coal  and  briquette  shipments  in  certain  localities.  But 
the  second  method  is  the  more  generally  used.  As  in  the  case 
of  the  usual  tare,  this  allowance  may  be  made  on  the  basis  of  a 
certain  fixed  weight  per  package  or  on  the  percentage  basis,  and 
may  refer  either  to  the  gross  or  to  the  net  weight. 

Other  weight  allowances  are  seldom  made  in  the  invoice. 
On  the  contrary  they  are  generally  made  from  case  to  case,  either 
on  the  basis  of  special  agreements  or  of  commercial  usage,  as 
re-imbursements  granted  to  the  buyer,  and  may  have  either  the 
form  of  a  price  reduction  or  a  weight  deduction,  as  for  leakage, 
etc. 

Less  often  than  in  merchandise  sold  by  weight,  allowances 
are  made  in  the  case  of  goods  sold  by  the  piece.  In  some  mar- 
kets the  system  of  such  allowances  has  become  such  an  estab- 
lished usage  that  it  affects  the  actual  standard  of  measurements. 
Thus  in  the  lumber  trade  of  London  a  standard  hundred  means 
120  pieces. 


222  INTERNATIONAL  COMMERCE 

c)     The  Price  Denomination. 

In  international  sales  contracts  a  price  can  be  quoted  in  the 
currency  of  the  exporting  country,  in  the  currency  of  the  im- 
porting country,  or  in  the  currency  of  a  third  country. 

Quoting  in  the  currency  of  his  own  country  the  vendor  has 
the  advantage  of  being  able  to  make  his  calculations  without 
reference  to  the  fluctuations  in  the  exchange  market  and  of  be- 
ing able  to  collect  his  bills  with  less  expense  than  where  his 
prices  are  expressed  in  foreign  currency. 

But  quoting  in  the  currency  of  the  exporting  country  may 
in  some  instances  be  an  obstacle  to  the  expansion  of  the  export 
trade,  which  is  increased  in  its  detrimental  effects  in  proportion 
as  the  currency  of  the  exporting  country  is  unknown  to  the 
buyers  in  the  importing  country;  further  in  proportion  to  the 
fluctuations  to  which  that  currency  is  subject.  This  obstacle  is 
particularly  forbidding  where  there  is  no  direct  exchange  of 
commercial  bills  between  the  two  countries. 

The  development  of  export  trade  (apart  from  such  con- 
siderations as  the  possession  by  the  importer  of  credits  in  the 
exporting  country  for  merchandise  shipped  there)  is  best  fur- 
thered by  quoting  in  the  currency  of  the  importing  country,  be- 
cause as  a  rule  merchants  in  the  importing  countries  prefer  to 
buy  and  figure  in  their  own  currency.  They  can  make  their 
calculations  with  greater  ease  and  accuracy  and  feel  less  im- 
periled by  exchange  fluctuations.  But  such  a  method  is  a  risky 
one  for  the  vendor.  The  risk  is  increased  in  proportion  to  the 
likelihood  of  fluctuations  of  exchange  in  his  own  or  in  the  im- 
porting country.  If  the  importing  country  uses  also  gold  coins 
he  can  eliminate  the  risk  by  inserting  in  his  quotation  the  clause 
"payable  in  gold."  But  here  the  risk  of  exchange  fluctuations 
is  merely  passed  on  to  the  buyer,  who  bears  the  local  exchange 
fluctuation  in  his  home  currency  in  relation  to  its  gold  equivalent. 

Prices  quoted  in  the  currency  of  a  third  country  are  custom- 
ary where  the  currency  of  the  exporting  country  is  little  known  in 
the  importing  country,  quotations  in  the  currency  of  the  importing 
country  are  considered  too  risky,  and  the  customers  are  accus- 
tomed to  figuring  in  the  currency  of  a  third  country.  Such  a 
currency  is  usually  the  stable  currency  of  a  country  whose  bills 


PB1CE  DENOMINATION  fc$3 

are  current  both  in  the  exporting  and  the  importing  country. 
This  was  formerly  very  largely  the  case  in  the  use  of  the 
British  sterling  currency.  But  the  use  of  such  a  third  medium, 
even  in  the  best  of  cases,  involved  an  additional  risk  of  exchange 
loss  both  for  the  vendor  and  for  the  buyer. 

One  of  the  effects  of  the  financial  re-adjustments  as  the 
result  of  the  world  war  will  be  the  growing  practice  of  quoting 
for  American  goods  or  even  for  goods  shipped  to  America  in 
dollars. 

The  practice  for  all  the  three  cases  mentioned,  where  the 
currency  indicated  in  the  sales  price  is  not  current  at  the  place 
of  payment,  is  to  convert  it  into  money  current  in  the  place  of 
payment,  unless  this  is  expressly  forbidden  in  the  contract. 

If  the  debtor  desires  to  pay  the  bill  on  the  basis  of  a  con- 
version into  the  currency  of  his  own  country,  the  British  laws 
provide  that  foreign  drafts  drawn  upon  the  United  Kingdom  in 
foreign  currency  are  to  be  converted  into  sight  drafts  at  the  rate 
of  exchange  prevailing  on  the  day  of  payment  in  the  place  of 
payment.  This  principle  is  followed  in  most  oversea  countries. 
Contracts  in  the  export  trade  largely  contain  the  clause  that  the 
conversion  is  to  be  effected  upon  the  day's  exchange  rate  for 
the  currency  in  which  the  invoice  is  expressed,  and  the  exchange 
rate  is  taken  as  prevailing  in  a  specified  place.  In  this  connec- 
tion it  is  not  always  into  sight  drafts,  but  often  into  time  drafts 
(in  Central  and  South  America  usually  90  day  sight  drafts) 
that  the  invoice  amount  must  be  converted.  British  usage  also 
differentiates  between  the  rate  at  which  banks  buy  or  sell  bills 
abroad,  and  it  is  usual  to  demand  the  conversion  at  the  more 
expensive,  the  bank's  selling  rate. 

In  accordance  with  this  when  quotations  are  made  in  over- 
sea business  in  the  sterling  currency  the  following  payment 
clause  is  employed:    "payable  at  the  current  drawing  rate  for 

the (here  follows  the  name  of  the  collecting  bank)  Bank's 

drafts  at sight  on  London."     This  is  the  rate  at  which 

the  importer  obtains  from  the  bank  drafts  for  the  purpose  of 
remittance. 

We  may  passingly  add  to  these  three  methods  of  quoting 
prices,  the  practice  prevailing  in  some  markets  of  quoting  prices 
in  commodity  exchange  media.     This  practice  prevails  in  cer- 


224  INTERNATIONAL  COMMERCE 

tain  undeveloped  territories  where  foreign  traders  deal  with  the 
native  population  largely  on  the  basis  of  barter  transactions. 

Where  the  quoting  of  prices  in  a  certain  currency  is  con- 
nected with  a  risk  of  exchange  fluctuations  then  that  contract- 
ing party  which  bears  the  risk  can  provide  ways  and  means  to 
eliminate  or  to  reduce  the  element  of  risk  involved.  The  vendor 
may  sell,  the  buyer  may  buy  foreign  funds  available  at  the  time 
when  the  vendor  must  dispose  or  the  buyer  must  provide  these 
funds. 

The  simplest  method  of  attaining  this  result  is  to  make  an 
arrangement  with  a  bank  inducing  it  either  to  accept  or  to  fur- 
nish at  some  future  time  suited  to  the  trader's  needs  an  ac- 
curately or  approximately  determined  amount  of  foreign  cur- 
rency at  a  definite  rate  of  exchange.  The  vendor  may  in  such 
cases  transfer  his  claim  to  the  bank  when  due,  or  turn  over  to 
it  remittances  or  commercial  bills  received  by  him,  or  he  can 
have  the  amounts  due  to  him  collected  by  a  third  party  in  the 
country  where  his  debtor  resides,  and  when  due,  place  at  the  dis- 
posal of  the  bank  round  sums  of  foreign  funds  in  the  country 
concerned,  usually  with  a  bank  there  located,  preferably  the  cor- 
respondent of  the  first  bank. 

The  buyer  who  owes  an  amount  in  foreign  currency  obtains 
in  due  time  from  a  bank  the  remittances  which  he  requires  or 
places  the  amount  due  with  a  bank  at  the  disposal  of  the  cred- 
itor, perhaps  by  opening  an  acceptance  credit.  If  he  has  been 
drawn  on  in  foreign  currency,  he  can  have  the  bank  guarantee 
him  a  certain  conversion  rate,  so  that  he  will  have  to  arrange 
with  the  bank  for  the  difference  between  the  rate  guaranteed 
and  the  rate  prevailing  when  his  remittance  funds  are  payable 
to  the  creditor. 

A  more  difficult  proceeding  from  the  point  of  view  of  the 
technique  involved  is  when  the  trader  covers  his  exchange  re- 
quirements in  the  open  exchange  market.  In  this  connection  the 
vendor  can  use  his  claims  against  his  debtor  only  in  such  cases 
when  he  has  commercial  bills  to  a  considerable  amount,  and  they 
are  of  such  a  character  that  they  may  be  traded  in  at  the  ex- 
change. Apart  from  the  size  of  these  bills,  however,  they  are 
made  out  in  the  name  of  some  foreign  bank  where  the  buyer  has 
made  arrangements  to  cover  the  amount  due,  and  they  are  not 


PRICE  DENOMINATION  225 

of  a  character  permitting  them  to  be  traded  in  on  the  exchange. 
If  the  buyer  seeks  to  procure  remittances  on  the  exchange  in 
order  to  meet  his  requirements,  he  will  generally  find  that  only 
large  round  sums  in  such  remittances  are  traded  in  on  the  ex- 
change, and  bills  of  specific  amount  and  with  a  specific  due  date, 
such  as  he  requires  to  settle  his  obligations,  are  only  rarely  ob- 
tainable on  the  exchange. 

But  the  trader  may  cover  himself  against  the  risk  of  the 
loss  in  the  exchange  rate  without  trading  in  his  actual  bills,  but 
by  a  concurrent  speculation  in  futures.  An  exporter  who  knows 
that  in  about  six  months  he  will  have  at  his  disposal  20,000 
pesetas  in  Madrid,  whether  as  the  result  of  one  or  of  several 
transactions,  can  sell  20,000  pesetas  deliverable  in  six  months 
on  an  exchange  where  pesetas  are  traded  in  for  future  delivery, 
and  having  assured  himself  by  such  means  of  a  fixed  exchange 
rate  can  make  his  calculations  accordingly. 

If  before  the  expiration  of  the  six  months  the  exchange  rate 
on  the  pesetas  has  fallen,  then  he  can  buy  back  the  20,000  pesetas 
at  a  lower  rate  for  the  same  term,  which  covers  him  for  the 
loss  he  suffers  when  he  collects  the  money  due  for  his  merchan- 
dise through  the  drop  in  the  exchange  rate.  However  such  gains 
are  not  the  aim  of  the  exporter.  His  aim  is  to  assure  himself 
a  fixed  exchange  rate.  In  the  case  of  the  importer  the  process 
is  the  reverse:  he  buys  foreign  funds  for  future  delivery  and 
has  when  the  time  comes  a  remittance  for  his  creditor  at  a  fixed 
rate  of  exchange. 

The  exporter  may  attempt  to  cover  himself  against  the  risk 
of  the  exchange  fluctuations  by  converting  the  amount  of  the 
invoice  at  an  arbitrary  rate  of  exchange,  unfavorable  to  the  other 
party,  or  by  disguising  this  fluctuation  insurance  in  his  quotation, 
but  such  a  course  undermines  his  ability  to  compete. 

Finally  the  exporter  and  the  importer  may  deliberately  leave 
the  exchange  fluctuation  risk  open  as  a  gamble  or  speculation, 
or  the  two  contracting  parties  may  agree  that  the  exchange  rate 
is  guaranteed  at  a  fixed  rate,  any  benefit  above  that  to  accrue 
to  the  guaranteeing  party,  as  for  instance  is  done  in  the  import 
business  in  Shanghai  when  the  Chinese  trader  buys  from  Amer- 
ican or  European  importers  in  taels,  and  guarantees  a  certain 


ji'b  INTERNATIONAL  COMMERCE 

minimum  exchange  rate  of  taels,  but  is  credited  with  any  gains 
if  the  tael  in  the  meanwhile  should  rise  in  value. 

On  the  whole  the  currency  in  which  a  merchandise  is  quoted 
has  this  effect  upon  the  price  of  the  merchandise  that  the  invoiced 
price  is  always  higher  the  greater  the  risk  of  exchange  fluctua- 
tion is  that  falls  upon  the  vendor  and  the  greater  are  the  costs 
of  collecting  as  caused  by  the  expression  of  price  quotation. 

d)     The  Time  Basis  of  Price  Calculation. 

As  distinct  from  contract  stipulations  regarding  the  terms 
of  payment,  it  is  of  interest  to  study  the  time  basis  on  which  the 
prices  for  merchandise  are  figured.  These  may  be  cash  prices, 
the  price  being  figured  as  due  before  delivery,  at  the  time  of  de- 
livery, or  a  very  short  time  after  delivery.  Or  they  may  be 
figured  on  the  basis  of  payment  in  the  future. 

In  the  case  of  cash  prices  payable  at  the  time  of  delivery, 
distinction  is  made  between  delivery  to  the  forwarding  agent 
(which  is  a  unilateral  transfer),  or  after  shipment  (against 
proof  of  same),  of  after  delivery  has  been  completed  (bi-lateral 
transfer).  In  the  latter  case  the  period  after  delivery  has  been 
effected  and  before  payment  is  made  may  be  so  brief  as  to  con- 
stitute practically  immediate  payment,  but  for  our  distinction 
it  suffices  to  note  that  a  period  of  time,  no  matter  how  brief, 
exists  between  the  time  of  delivery  and  payment,  and  that  dur- 
ing this  period  of  time  the  buyer  disposes  of  the  goods. 

We  are  not  here  concerned  with  the  contract  stipulations 
as  to  the  time  when  payment  is  to  be  effected,  but  with  the  time 
when  the  price  is  valid  exactly  as  quoted,  that  is  with  the  basis 
on  which  the  price  is  calculated.  Payment  may  be  made  either 
by  contract  or  by  commercial  usage  later  or  earlier  than  the  time 
basis  of  price  calculation,  leading  either  to  a  charge  of  interest 
or  to  the  deduction  of  discount. 

Thus  in  the  case  of  payment  against  the  delivery  of  the 
Bills  of  Lading  or  against  the  delivery  of  the  goods,  or  within  a 
very  short  time  thereafter,  it  does  not  signify  in  oversea  busi- 
ness that  the  price  had  been  figured  as  due  at  that  time.  On  the 
contrary,  even  in  such  sales  conditions,  the  cash  price  had  been 
generally  figured  as  due  when  the  goods  were  shipped,  which  ter- 


PEICE:   TIME  BASIS  827 

minates  the  vendor's  performance,  and  interest  or  exchange  is 
collected.  As  a  rule  special  clauses  modify  cash  prices,  as  "net 
cash,"  expressing  both  the  cash  basis  of  price  calculation  and  the 
requirement  to  pay  cash. 

In  the  case  of  cash  prices  payable  after  delivery  has  been 
effected,  a  very  brief  period  of  grace  is  generally  conceded  to  the 
buyer,  at  the  expiration  of  which  the  cash  price  becomes  due. 
Such  periods  of  grace  are  very  rare  in  the  case  of  cash  prices 
payable  at  the  time  of  delivery. 

The  period  within  which  cash  prices  are  valid  may  be 
figured  as  beginning  with  the  date  of  invoice  (which  is  the  regu- 
lar procedure),  or  with  the  date  of  the  documents  and  of  their 
receipt  by  the  buyer — usual  procedure  in  sales  to  European  ex- 
porters— or  from  the  day  when  the  documents  are  shown  to  the 
buyer,  as  in  sales  to  oversea  customers  on  the  basis  of  "docu- 
ments against  payment,"  where  payment  is  effected  by  sight 
drafts,  or  from  the  day  of  the  arrival  and  of  the  receipt  of  the 
goods  by  the  buyer  (in  some  cases  various  circumstances  may 
interpose  a  period  of  time  between  arrival  at  destination  and  re- 
ceipt by  the  buyer),  or  sometimes  this  period  is  dated  from  the 
last  day  of  the  preceding  or  the  first  day  of  the  following  month, 
in  connection  with  monthly  statements.  Sometimes  finally  a  fic- 
tion of  future  delivery  is  maintained  through  the  practice  of 
postdating  the  invoice.  In  the  case  of  cash  prices  this  extra 
time  allowed  for  payment  runs,  according  to  market,  merchan- 
dise and  commercial  usage,  from  3  to  30  days. 

Prices  based  on  the  payment  in  the  future  become  due 
after  the  goods  are  delivered  and  always  some  time  later  than 
cash  prices  figured  for  the  same  class  of  trade.  Payment  is  gen- 
erally due  in  these  cases  on  a  day  determined  by  the  occurrence 
of  some  future  event,  such  as  arrival  of  the  goods,  or  it  is  in- 
dicated approximately,  as  "before  next  season."  The  period  for 
which  credit  is  granted  is  indicated  in  the  terms :  "payable  jo  or 
go  days"  (as  the  case  may  be)  which  are  noted  on  the  invoice. 
The  credit  period  is  superimposed  upon  the  grace  usually  granted 
for  cash  prices. 

Ordinarily  the  date  of  the  invoice  is  the  time  basis  for  price 
calculations.  But  since  it  is  the  aim  to  grant  credit  to  the  buyer 
and  the  time  of  transportation  is  an  uncertain  element,  it  is  fre- 


228  INTERNATIONAL  COMMERCE 

quently  customary  in  oversea  business  to  reckon  the  credit  period 
from  the  day  of  arrival  of  the  goods,  thus  precluding  the  pos- 
sibility of  the  time  allowed  expiring  before  the  arrival  of  the 
goods. 

Postdating  invoices  is  an  abuse  which  is  met  with  in  lines 
of  trade  in  which  payment  conditions  are  unsatisfactory  and  the 
competition  keen,  leading  the  suppliers  to  cater  to  the  delinquency 
of  customers  in  the  matter  of  prompt  settlements. 

Instalment  payments  with  varying  maturities  are  not  fre- 
quent in  oversea  trade.  Occasionally  it  is  agreed  that  Vs  of  the 
invoice  is  paid  in  advance,  Ys  on  delivery  and  V3  on  time. 

The  time  of  payment  in  accordance  with  the  contract,  as 
well  as  the  time  when  the  price  is  effective  as  quoted  may  be  still 
further  extended  through  the  existence  of  recognized  days  of  pay- 
ment. These  are  in  some  places  established  by  law  and  commer- 
cial usage.  In  Trieste,  for  instance,  Friday  is  the  recognized  pay- 
ment day  for  wholesale  accounts.  Many  concerns  arbitrarily 
fix  a  certain  day  of  the  month,  5th  or  10th  or  15th,  on  which 
they  pay  their  bills.  Two  firms  in  constant  business  connection 
may  agree  upon  a  definite  day  each  month  for  their  settlements. 

To  sum  up,  from  the  point  of  view  of  the  time  basis  of  price 
calculation,  prices  are  quoted  on  cash  basis  and  on  time  basis. 
The  amount  eventually  paid  does  not  always  correspond  with  the 
price  as  quoted.  If  a  cash  price  is  quoted,  and  payment  is  de- 
layed, interest  is  charged.  In  time  basis  price  quotations  a  cer- 
tain period  in  the  future  is  assumed  when  the  price  is  valid  in 
its  quoted  form,  and  payment  before  or  after  that  period  re- 
quires adjustments  in  the  shape  of  discounts  or  interest  charges 
respectively.     This  brings  us  to  the  consideration  of  discounts. 

e)     Discounts  and  Rebates. 

Contrary  to  cash  prices,  where  goods  are  sold  on  time  the 
price  should  contain  an  indemnification  for  the  loss  of  interest 
suffered  by  the  vendor  because  of  the  later  receipt  of  the  pay- 
ment. Since,  however,  it  is  repugnant  to  commerce  from  the 
point  of  view  of  bookkeeping  to  have  two  scales  of  prices,  it  is 
customary  to  employ  either  cash  prices  or  credit  prices.  In  the 
latter  case  the  customer  has  the  choice  whether  to  utilize  the 


DISCOUNTS  AND  REBATES  229 

time  allowed  for  payment  or  to  pay  cash,  or  cash  payment  may 
be  insisted  upon.  The  first  is  indicated  by  noting  on  invoice 
"30  or  90  days,.  .  .  %  discount  for  cash,"  "or  net  30  days,.  .  .  % 
discount  for  cash."     In  the   second   case    the    invoice   "payable 

within days,   %  discount,"  which  would  indicate  that 

cash  payment  is  desired. 

Where  the  buyer,  whether  voluntarily  or  otherwise,  pays 
on  the  basis  of  cash,  but  the  invoice  price  is  figured  on  time 
basis,  it  is  customary  to  grant  him  an  abatement  in  price  equal 
to  the  loss  in  interest  which  the  vendor  had  in  mind  in  determin- 
ing the  price. 

The  most  customary  method  of  granting  such  reductions 
is  in  the  form  of  cash  discounts.  A  cash  discount  is  that  reduc- 
tion in  price  figured  on  percentage  basis  to  which  a  buyer  can 
lay  claim,  if  he  pays  for  goods  either  before  or  on  delivery,  or 
where  a  time  allowance  for  cash  payments  exists,  if  he  pays 
before  the  expiration  of  this  time  allowance  for  cash  payments. 
In  some  places  an  extra  cash  discount  is  granted  for  payment 
within  7  days.  If  the  time  allowance  for  cash  payments  has 
expired,  the  buyer  has  no  further  claim  on  cash  discounts.  In 
countries  and  markets  where  buyers  habitually  fall  back  upon 
the  indulgence  of  their  suppliers  and  exceed  time  allowances, 
some,  particularly  German  creditors,  have  been  in  the  habit  of 
granting  cash  discounts  nevertheless,  which  is  an  abuse  of  the 
discount  privilege. 

The  amount  of  discount  rates  depends  upon  the  average 
payment  conditions  in  a  given  country.  The  poorer  these  are, 
the  higher  are  the  discount  rates  granted  particularly  by  for- 
eign creditors.  Another  factor  of  importance  is  the  prevailing 
rate  of  interest.  Occasionally  the  buyer  is  allowed  a  discount 
on  the  basis  of  interest  re-imbursement  for  so  and  so  many  days 
if  he  pays  cash  before  the  expiration  of  his  credit  time. 

The  practice  of  quoting  prices  on  the  basis  of  time  payment 
is  so  common  that  in  many  lines  of  business  where  strictly  cash 
dealings  prevail  calculations  are  made  on  the  time  basis  and  a 
cash  discount  on  these  prices  is  granted.  Net  cash  prices  are 
not  subject  to  discount. 

Credit  may  be  granted  even  on  the  basis  of  net  cash  prices 
by  charging  interest  until  the  time  of  actual  payment.     This  is 


230  INTLUlsATIONAL  COMMERCE 

done  either  by  charging  interest  in  the  account  current  or  by 
adding  interest  to  the  invoice  or  including  it  in  the  draft  at  the 
time  of  settlement.  In  the  export  business  this  is  generally  done 
by  invoicing  on  the  basis  of  net  cash  prices  and  drawing  on  the 
basis  of  the  invoices,  but  incorporating  an  interest  clause  in  the 
draft.  The  drawee  pays  interest  from  the  day  the  draft  is  drawn 
until  such  day  as  remittance  may  be  estimated  to  reach  Europe 
or  America.    Such  a  clause  may  read  as  follows :   "with  interest 

at per  cent,  per  annum  added  thereto  from  date  hereof  to 

approximate  due  date  of  arrival  of  the  remittance  in  New  York." 
Usually  the  "exchange"  is  also  added,  being  the  amount  which 
the  English  and  American  banks  charge  when  buying  oversea 
bills  in  sterling  and  dollars  respectively. 

As  a  rule  interest  is  charged  when  the  buyer  fails  to  pay  an 
invoice  promptly  at  maturity.  This  is  done  generally  by  special 
agreement,  though  sometimes  commercial  usage  regulates  it. 
Austrian,  German  and  French  laws  clearly  specify  such  interest. 
In  English  and  American  usage  it  is  customary  to  base  such  in- 
terest charges  on  special  agreement.  But  unless  there  is  such  a 
special  agreement  or  a  commercial  usage  of  local  character,  it 
is  difficult  to  collect  such  interest  charges  without  jeopardizing 
future  dealings  with  the  customer.  In  some  markets  dilatoriness 
in  such  matters  is  the  rule,  and  this  tendency  is  counteracted 
by  suitable  increases  of  the  original  price. 

The  rebate  is  a  price  allowance  on  percentage  basis  with  the 
aim  of  reducing  the  price  of  invoiced  goods.  While  cash  dis- 
count is  an  allowance  corresponding  with  the  saving  of  interest 
to  the  seller,  the  rebate  is  a  pure  price  reduction,  and  is  an  allow- 
ance not  relating  to  the  factor  of  time.  The  rebate  is  customary 
where  prices  as  marked  are  accessible  to  a  variety  of  customers 
and  even  to  consumers  and  the  vendor  may  desire  to  grade  in- 
dividual prices  in  accordance  with  the  class  of  customers  reached. 
He  likewise  may  have  the  desire  of  effecting  price  reductions 
at  various  times  in  the  future.  Again  it  may  be  desired  to  create 
the  impression  of  a  special  concession  in  the  mind  of  individual 
customers. 

Rebates  are  frequent  where  the  manufacturer  offers  his 
goods  to  the  middleman  and  at  the  same  time  to  circles  which 
may  be  partly  composed  of  the  middleman's  customers. 


ELEMENTS  OF  QUOTATIONS  231 

In  Germany  rebates  have  been  currently  granted  to  foreign 
customers,  as  compared  with  the  rates  of  domestic  customers, 
but  this  practice  is  repugnant  to  the  American  legislation. 

Rebates  are  frequently  indicated  in  the  form  of  an  addition, 
as  50,  10  and  5%  rebate. 

Occasional)'  the  rebate  is  combined  with  the  cash  discount, 
and  the  whole  allowance  is  called  discount. 

A  special  rebate  is  often  granted  to  buyers  who  in  the  course 
of  a  season  purchase  goods  in  excess  of  a  certain  specified  quan- 
tity. 

f)     The  Costs  of  Transportation,  Insurance  and  Incidentals 
as  Elements  of  the  Quotation. 

The  prevailing  commercial  usage  broadly  burdens  the  vendor 
with  the  cost  of  turning  over  the  goods  to  the  possession  of 
the  buyer,  and  the  buyer  with  the  cost  of  taking  possession. 
The  first,  under  German,  French  and  English  laws  and  under 
American  commercial  usage  includes  all  acts  which  the  vendor 
must  undertake  at  the  place  of  the  performance  of  the  contract, 
up  to  the  point  of  turning  over  the  goods  to  the  forwarding  agent 
(unilateral  transfer  of  goods).  Thus,  unless  commercial  usage 
in  specific  lines  prescribes  differently,  or  special  agreements  be- 
tween contracting  parties  rule  differently,  we  will  in  the  follow- 
ing consider  those  expenses  which  are  incurred  in  turning  over 
the  goods  at  the  place  of  performance  to  the  buyer  or  to  the 
forwarding  agent  as  chargeable  to  the  vendor,  while  those  ex- 
penses as  are  incurred  thereafter  and  in  connection  with  forward 
ing  from  the  place  of  performance  as  chargeable  to  the  buyer. 

The  determination  of  weights  and  measurements  is  effected 
at  the  cost  of  the  vendor,  excepting  where  an  official  certificate 
in  the  interest  of  both  contracting  parties  is  required,  or  a  spe- 
cial inspection  in  the  interest  of  the  buyer  only  is  necessary. 
In  the  former  case  either  by  agreement  or  by  usage  generally 
both  parties  bear  the  expense  share  and  share  alike,  in  the  second 
case  the  buyer  bears  the  expense. 

Packing  is  generally  at  the  expense  of  the  buyer  to  the  extent 
that  it  is  necessary  to  insure  the  safety  of  goods  during  trans- 
portation, and  to  the  expense  of  the  vendor  to  the  extent  that 


232  INTERNATIONAL  COMMERCE 

it  is  needed  for  the  make-up  of  the  goods  and  pertains  to  the 
properties  of  the  goods.  Many  commercial  usages  prevail  in 
this  connection  that  seem  to  contradict  this  general  principle. 
Thus  for  instance  it  is  customary  among  re-sellers  of  imported 
products  in  original  packing,  even  where  it  is  not  a  component 
part  of  the  make-up  of  the  goods,  to  include  the  packing  in  their 
quotation,  and  in  the  sale  of  goods  for  export  where  the  export 
packing,  partakes  of  the  character  of  the  make-up  to  charge  extra 
for  packing. 

It  is  frequently  customary  in  the  case  of  expensive  pack- 
ings to  leave  the  cost  of  packing  to  special  agreement  in  contract 
or  to  state  in  price  lists  "including  barrels,  sacks,  etc.,"  or 
"packing  extra." 

Where  the  price  is  quoted  including  packing,  sometimes  the 
buyer  has  the  right  to  return  the  packing  at  his  cost  and  risk 
and  to  receive  a  fixed  refund. 

Where  the  price  is  exclusive  of  packing,  sometimes  the 
buyer  is  obliged  to  provide  packing  within  a  certain  time,  other- 
wise the  vendor  supplies  it  at  the  buyer's  costs.  In  certain  pack- 
ings which  are  used  repeatedly,  they  are  frequently  not  charged 
to  the  buyer  but  only  loaned  to  him  at  a  certain  fixed  rate.  The 
return  is  effected  at  the  buyer's  risk  and  cost.  Commercial 
usage  and  contractual  agreements  may  govern  the  return  against 
total  or  partial  refund  of  packing  charged  to  the  buyer. 

In  the  export  trade  quotations  including  packing  are  the 
rule  and  are  preferred  by  the  buyers,  as  they  offer  them  a  more 
rational  basis  for  calculations.  In  many  places  the  customers  are 
apt  to  make  unreasonable  deductions  where  packing  costs  are 
added  as  a  separate  item. 

The  cost  of  transportation  arising  after  the  goods  have 
passed  from  the  possession  of  the  vendor  at  the  place  of  per- 
formance of  contract  are  in  principle  chargeable  to  the  buyer. 
Since  in  the  shipment  of  goods  from  the  place  of  contract  per- 
formance the  act  of  presenting  the  goods  to  the  transporting 
medium  is  considered  as  the  act  of  trasferring  possession  from 
the  vendor  to  the  buyer,  the  cost  of  delivering  the  goods  to  the 
transport  medium  and  the  cost  of  loading  the  goods  at  the  point 
of  original  shipment  are  in  principle  borne  by  the  vendor. 


QUOTATIONS  233 

In  reality,  however,  commercial  usage  does  not  always  co- 
incide with  these  principles. 

The  figuring  and  the  charging  of  transportation  costs  is  al- 
most always  based  on  special  qualifying  clauses  sanctioned  by 
commercial  usage  and  forming  an  integral  part  of  the  quotation. 
These  clauses  have  through  commercial  usage  attained  in  some 
instances  a  significance  that  is  not  identical  with  their  literal  in- 
terpretation. 

In  the  following  we  will  consider  these  qualifying  clauses 
as  indicating  the  extent  to  which  the  price  quoted  includes  trans- 
portation and  similar  costs: 

i.  Price  quoted  for  goods  as  lying  in  a  warehouse  or  wher- 
ever they  may  be  located,  with  the  task  of  fetching  them  and 
shipping  them  thence  and  the  cost  of  these  operations  chargeable 
to  the  buyer.  Such  clauses  are  "ex  warehouse",  ex  quay",  "ex 
ship",  "at  factory",  "at  plant."  The  expression  "first  cost"  fre- 
quently used  in  oversea  commerce  in  raw  products  indicates  that 
the  price  includes  all  costs  up  to  the  placing  or  the  goods  in  the 
warehouse,  where  they  are  ready  for  the  buyer. 

2.  Quotations  indicating  that  the  vendor  assumes  the  obliga- 
tion of  loading  the  goods  upon  the  transport  medium  immediate- 
ly adjoining  the  location  of  the  goods.  Such  quotations  are 
"f.o.b.  cars,"  or  "f.o.b.  ship,"  where  the  railway  siding  or  the 
dock  adjoin  immediately.  The  expression  "f.  o.  b."  (free  on 
board)  is  frequently  loosely  used,  though  commercial  usage  gen- 
erally prescribes  a  specific  meaning  for  various  classes  of  goods 
and  various  ports  of  shipment. 

3.  If  it  is  necessary  to  deliver  the  goods  from  the  place 
where  they  are  located  to  the  loading  point,  the  vendor  assumes 

the  cost  and  the  quotation  reads  "f.o.b railway  station," 

or  "f .a.s."  —  "free  alongside,"  the  latter  meaning  placed   free 
alongside  ship. 

4.  Where  the  costs  of  transportation  up  to  a  certain  point 
and  of  possible  transshipment  or  reloading  are  included,  the 
clause  reads  "freight  free"  or  "delivered  in." 

Sometimes  a  district  is  assumed  as  a  basis  for  freight  calcu- 
lation. Thus  in  the  iron  and  steel  trade  quotations  frequently 
read:   "freight  Pittsburgh  district,"  which  means  that  the  goods 


234  INTERNATIONAL  COMMERCE 

will  be  delivered  free  from  the  factory  to  a  railway  station  from 
which  the  Pittsburg  district  freight  rates  prevail.  Or  it  may 
mean  that  the  vendor  will  pay  any  difference  between  the  actual 
freight  rate  and  the  Pittsburg  district  freight  rate. 

In  the  oversea  trade  it  is  customary  to  include  the  so-called 
first  cost  and  the  freight  in  a  quotation  known  as  c.  &  f.  or  c.  f., 
and  when  the  insurance  is  included,  the  clause  is  expressed  as 
"c.i.f.  or  OF,"  meaning  first  cost,  insurance  and  freight  charges. 

When  the  price  is  quoted  including  transportation  up  to  a 
certain  point  where  the  goods  must  be  unloaded  from  the  trans- 
port medium,  and  it  is  intended  that  the  vendor  assume  the 
costs  of  transportation  until  the  point  of  unloading  is  reached, 
while  the  buyer  is  to  bear  the  costs  of  further  operations,  it  is 
sometimes  customary  to  use  the  expression  "f.o.b.  point  of  des- 
tination." 

If  the  vendor  bears  the  costs  of  unloading  at  the  point  of 
the  arrival  of  the  goods,  the  clause  "f.  a.  q."  (free  at  quay)  is 
used.  "Delivered  overside,"  means  that  the  vendor  bears  the 
cost  of  unloading  from  the  ship  into  barges  or  tugs  or  upon  the 
quay,  if  alongside  ship.  The  expression  "sous  palan"  used  in 
French  commercial  usage  means  that  the  buyer  bears  the  cost 
of  unloading  from  the  moment  the  merchandise  swings  from  the 
ship's  derrick. 

The  vendor  may  assume  the  cost  of  delivering  the  goods  to 
the  warehouse  of  the  buyer,  "delivered  in  store",  "free  godown." 

In  certain  Far  East  points  it  is  customary  for  the  buyer  to 
accept  the  goods  at  his  option  within  a  certain  time  after  their 
arrival,  and  c.i.f.  prices  in  such  cases  include  also  warehouse  ex- 
penses and  fire  insurance  at  warehouse.  Commercial  usage  does 
not  prescribe  any  other  designation  than  "c.i.f."  for  this  busi- 
ness. Thus  in  Shanghai  it  is  regularly  understood  that  "c.i.f." 
quotations  in  shillings  do  not  include,  but  "c.i.f."  quotations  in 
taels  do  include  all  expenses,  including  customs  charges  accru- 
ing until  the  goods  are  accepted,  which  is  generally  sixty  to  nine- 
ty days  after  arrival. 

In  some  instances  the  costs  of  transportation  are  chargeable 
to  the  debit  of  one  party,  but  are  paid  by  the  other  and  later 
accounted  for.     This  may  be  done  for  the  convenience  of  the 


QUOTATION  CLAUSES 

other  party,  or  when  one  or  the  other  may  have  better  means 
of  controlling  the  rates  or  of  bringing  up  claims  against  the  car- 
rier for  damages  to  the  shipment  or  for  shortage. 

The  value  of  quotations  on  the  basis  of  delivery  at  the  des- 
tination lies  in  the  fact  that  the  buyer  can  more  accurately  gauge 
the  cost  of  the  merchandise.  It  is  frequently  very  difficult  for 
the  buyer  to  make  such  an  estimate  in  the  early  stages  of  the 
transaction.  It  is  particularly  difficult  for  the  foreign  buyer  to 
estimate  the  cost  of  shipping  goods  from  a  factory  to  the  ship- 
ping port.  The  items  of  ocean  transportation  and  of  insurance 
are  also  subject  to  fluctuation.  In  order  to  facilitate  the  calcu- 
lations of  the  buyer  it  is  often  customary  to  guarantee  to  him 
a  maximum  sum  as  freight  expenditure,  or  to  indicate  to  the 
buyer  the  freight  rate  per  unit  to  destination,  when  quoting  with 
delivery  at  port  of  shipment  only. 

Quoting  "loco"  or  "ex  warehouse"  or  "f.o.b.  mill  or  fac- 
tory," or  any  quotation  short  of  delivery  at  destination,  or  with- 
out indicating  the  cost  to  the  buyer  of  shipment  to  destination, 
is  frequently  an  obstacle  to  the  free  expansion  of  foreign  trade. 

In  oversea  trade,  manufacturers  generally  quote  their  over- 
sea customers  on  the  basis  of  delivery  at  the  port  of  shipment 
and  indicate,  where  necessary,  the  cost  of  ocean  shipment  to  des- 
tination. Oversea  importers  receive  their  quotations  either  f.o.b. 
or  c.i.f.  F.o.b.  or  first  cost,  is  a  favorite  quotation  in  large  pur- 
chases where  the  buyer  prefers  to  charter  his  own  ships  or  space 
in  ocean  vessels,  and  can  secure  a  lower  rate  than  the  vendor. 

Customs  duties  and  local  tolls  and  taxes  are  paid  by  the 
vendor  as  long  as  they  arise  through  transportation  to  the  point 
of  the  contract  performance,  but  after  that  by  the  buyer.  With 
regard  to  local  taxes  the  distinction  is  made  whether  these  arise 
during  the  process  of  production  or  after  the  goods  pass  into  the 
stage  of  transportation.  In  the  first  case  the  tax  is  a  portion  of 
the  cost  of  production,  and  is  borne  by  the  producer,  in  the  sec- 
ond case  generally  by  the  buyer.  Drawbacks  of  customs  duties 
go  to  the  benefit  of  the  party  which  had  paid  the  duty  in  the 
first  instance. 

Prices  including  duty  are  quoted  "duty  paid."  Goods  quoted 
"in  bond"  do  not  include  the  payment  of  duties.     Duties  in  the 


236  INTERNATIONAL  COMMERCE 

export  trade  are  as  a  rule  borne  by  the  buyer.  In  the  import 
trade,  when  the  importer  sells  to  his  customers,  the  importer 
pays  the  duty,  though  he  may  have  received  the  goods  "in  bond." 

Quoting  "duty  paid"  is  a  practice  representing  a  high  degree 
of  willingness  to  accommodate  a  buyer  and  is  likely  to  stimulate 
export  trade,  but  on  the  other  hand  it  also  represents  a  consider- 
able increase  in  exporting  difficulties  from  the  point  of  view  of 
the  vendor,  by  augmenting  his  export  risk,  necessitating  a  great 
increase  of  capital  through  advancing  the  customs  duties  which 
in  many  instances  constitute  half  the  value  of  the  merchandise. 

The  export  risk  is  increased  first  in  the  matter  of  credit, 
which  in  addition  to  the  value  of  the  merchandise  must  include 
the  amount  of  customs  duties,  second  in  the  matter  of  possible 
unforeseen  increases  in  customs  duties,  third  in  the  matter  of  ex- 
change fluctuations. 

The  practice,  though  much  indulged  in  by  German  export- 
ers, is  not  recommended.  It  is  far  better  to  indicate  to  the 
buyer  what  the  customs  duties  will  amount  to.  Duty-paid  quota- 
tions are  common  only  in  inter-European  business. 

The  practice  of  quoting  in  European  import  "exclusive  of 
duty"  is  based  on  the  frequency  of  sales  from  the  place  of  im- 
port to  another  country,  when  the  goods  are  re-shipped  ex  bond 
without  the  payment  of  duties  in  the  original  country  of  entry. 

The  following  list  gives  the  explanation  of  the  most  current 
terms  and  abbreviations  used  in  quoting  and  referring  to  trans- 
portation : 

Bond — custody  of  dutiable  goods  in  government  warehouse 
on  which  it  is  desired  to  defer  payment. 

C.  &  F. — first  cost  and  freight,  not  including  insurance. 

C.I.F. — first  cost,  insurance,  freight. 

Cranage — charge  for  use  of  wharf  crane,  when  a  ship's  own 
appliances  are  inadequate  for  unloading. 

Ex-ship — sold  free  of  ship,  not  including  lightering. 

Ex-warehouse — sold  from  warehouse  door,  not  including 
cartage. 

F.A.Q. — free  at  quay. 

F.A.S. — free  alongside  ship. 

Free  Harbor — a  form  of  c.i.f.  contract  where  the  seller  is 


CASH  TERMS  237 

liable  for  all  risks  and  charges  until  the  goods  reach  their  port 
of  destination. 

Free  overboard — same  as  ex-ship. 

Freight — payment  for  ocean  carriage  of  goods. 

Freight  forward — freight  to  be  paid  by  consignee. 

g)     Cash  Terms. 

The  place  of  payment  is  the  place  where  payment  for  goods 
furnished  is  to  be  made.  Where  the  nature  of  the  business  or 
the  intent  of  contracting  parties  do  not  expressly  or  impliedly 
prescribe  another  place,  the  place  of  payment  is  generally  the 
place  where  the  debtor  carries  on  his  business.  Where  payment 
is  made  at  the  time  of  the  transfer  of  goods  from  the  possession 
of  the  vendor  into  that  of  the  buyer,  the  place  of  such  transfer 
is  the  place  of  payment. 

The  time  of  payment  differs  according  to  commercial  usage 
and  special  agreement  and  may  be  of  the  following  varieties: 

a)  Payment  in  advance  is  payment  for  goods  before  the 
vendor  undertakes  to  carry  out  his  contractual  obligations.  This 
payment  may  be  made  in  full  or  in  the  shape  of  a  partial  ad- 
vance payment.  This  is  customary  in  the  case  of  new  or  unre- 
liable customers  or  in  cases  necessitating  a  large  investment  of 
money  on  the  part  of  the  producer  or  the  preparation  of  articles 
to  special  specifications  which  cannot  be  disposed  of  readily  if 
refused  by  the  buyer. 

In  such  total  or  partial  pre-payment  the  buyer  appears  as 
the  vendor's  creditor.  Frequently  the  amount  is  deposited  with 
a  third  party,  usually  with  a  bank,  and  becomes  available  after 
shipment  or  inspection. 

b)  Goods  turned  over  against  payment.  This  method  af- 
fords the  vendor  a  certain  amount  of  security  against  loss,  pro- 
vided that  specially  manufactured  goods  are  not  concerned 
which  are  difficult  to  dispose  of.  If  the  place  of  contract  per- 
formance is  at  a  distance,  the  vendor  may  lose  the  cost  of  pack- 
ing and  transportation  in  the  event  of  the  buyer's  default.  In 
oversea  business  this  risk  is  increased,  as  the  costs  of  transporta- 
tion both  ways  may  be  high,  and  the  vendor  in  the  event  of  the 
buyer's  default  may  be  forced  to  dispose  of  his  shipment  at  a 


238  INTERNATIONAL  COMMERCE 

loss.  This  risk  may  be  lessened  if  payment  is  to  be  made  a  very 
short  time  after  shipment  because  in  that  case,  in  the  event  of 
default,  the  shipment  may  be  stopped  in  transit  and  brought  back, 
though  even  this  means  a  loss.  On  the  whole  the  risk  is  increased 
in  proportion  to  the  distance  which  separates  the  vendor  from 
the  buyer,  and  particularly  in  oversea  business  sometimes  it  is 
utterly  impracticable  to  bring  back  a  shipment  where  the  buyer 
defaults  in  payment. 

c)  Payment  after  shipment,  or  after  the  turning  over  of  the 
goods  to  the  forwarding  agent  or  carrier,  may  be  effected  be- 
fore the  arrival  of  the  goods  or  of  the  documents  at  destination, 
either  at  the  place  of  despatch  or  elsewhere.  If  the  buyer  is 
not  present  in  person  (or  through  a  representative)  it  is  the 
function  of  a  bank  to  effect  payment.  In  this  connection  as  a 
rule  certain  documentary  proofs  of  shipment  effected  must  be 
given  up,  through  which  act  the  vendor  surrenders  the  right  of 
disposing  of  the  goods.  These  documentary  proofs  include  the 
Bills  of  Lading,  the  insurance  policy  for  ocean  transportation — 
unless  the  buyer  effects  this  himself, — copy  of  invoice  which  gives 
the  details  of  the  shipment  concerned.  The  Bills  of  Lading  and  the 
policy  (or  insurance  certificate)  must  be  made  out  in  the  name 
of  the  buyer  or  to  his  order,  or  to  the  order  of  a  third  party 
(where  payment  is  made  by  a  third  party,  the  last  course  is  cus- 
tomary, for  his  security).  The  documents  may  also  be  made 
out  to  the  order  of  the  vendor  and  endorsed  in  blank. 

In  case  payment  is  effected  by  a  third  party  (usually  a  bank) 
it  is  customary  for  the  buyer  to  arrange  a  credit  for  the  vendor 
with  this  third  party.  This  is  done  by  means  of  a  letter  of  credit 
which  is  sent  by  the  buyer  to  the  vendor  with  the  order.  In  case 
the  party  entrusted  with  the  payment  expressly  obligates  him- 
self to  effect  payment  upon  the  accomplishment  of  acts  on  which 
payment  is  based,  such  a  letter  of  credit  is  called  "confirmed 
letter  of  credit,"  and  the  transaction  is  called  "confirmed  credit." 
The  vendor  under  such  circumstances  is  almost  as  sure  of  pay- 
ment as  though  payment  had  been  made  with  order.  But  un- 
fortunately the  description  of  this  credit  as  "confirmed  credit" 
is  inadequate,  and  for  this  reason  leads  in  various  places  to  a 
different  interpretation.  "Obligatory  credit"  would  be  the  more 
satisfactory  description.    As  it  is,  in  some  places  the  description 


CREDIT  TERMS  239 

''confirmed  credit"  is  meant  to  indicate  that  the  party  entru  ted 
with  the  payment  authorizes  the  vendor  to  make  use  of  it,  bul 
does  not  obligate  itself  to  make  payment. 

Another  very  customary  proceeding  in  payment  through 
third  parties  after  shipment  is  when  the  buyer  opens  a  negotia- 
tion credit  with  a  bank  at  the  place  of  shipment  for  the  amount 
of  the  draft  which  the  vendor  is  to  draw  on  him.  Here  the 
exporter  turns  over  the  documents  to  the  bank  and  sells  his  draft 
to  the  bank.  This  gives  the  vendor  the  advantage  of  immediate 
funds,  but  it  is  not  strictly  cash  payment,  for  as  a  rule  the  drawer 
of  the  draft  is  liable  to  the  bank  for  the  amount  thus  received 
until  the  buyer  honors  the  draft.  In  this  method,  as  in  the  usual 
method  of  drawing  drafts  against  acceptance  of  documents  and 
selling  them  to  any  bank,  the  banks  act  "with  recourse."  In  the 
first  instance  named,  the  bank  acts  because  of  confidence  in  the 
buyer,  in  the  second  because  of  confidence  in  the  seller. 

Payment  after  shipment  may  be  also  made  at  the  place  of 
destination,  either  against  the  surrender  of  the  merchandise  or 
against  the  delivery  of  shipping  documents,  particularly  of  the 
Bills  of  Lading.  In  the  first  case  the  payment  is  generally  ef- 
fected after  an  inspection  of  the  goods.  The  right  of  inspection 
is  a  prerogative  of  the  buyer,  unless  either  the  contract  or  pre- 
vailing commercial  usage  in  the  particular  line  of  merchandise 
and  the  particular  market  rule  otherwise.  In  export  business 
to  oversea  countries  such  an  inspection  generally  takes  place  in 
the  custom  house  of  the  port  of  destination,  in  the  presence  of 
a  person  in  the  confidence  of  the  vendor, — an  employee  of  his 
bank  or  his  representative. 

The  predominant  usage  in  oversea  business  is  payment 
against  documents.  This  may  be  effected  as  described  in  the  fore- 
going at  the  place  of  arrival  of  the  goods.  In  the  latter  case  pay- 
ment is  made  against  the  presentation  of  the  Bill  of  Lading,  insur- 
ance policy,  etc.  Payment  is  effected  either  on  arrival  of  the  docu- 
ments, or  some  time  later,  but  not  later  than  the  time  of  arrival 
of  the  goods.  Usually  the  collection  is  made  by  means  of  a 
sight  draft  upon  the  consignee,  payable  within  a  very  short 
period  after  sight,  which  the  consignee  accepts  against  the  pres- 
entation of  the  documents.  The  period  referred  to  generally  re- 
presents the  difference  in  time  between  the  arrival  of  the  docu- 


240  INTERNATIONAL  COMMERCE 

ments  and  the  draft  by  mail  and  the  arrival  of  the  goods  by  a 
slower  vessel.  Should  the  goods  arrive  sooner,  payment  is  ef- 
fected sooner. 

Occasionally,  in  order  to  assure  himself  against  risks,  the 
buyer  stipulates  that  in  payment  against  documents  he  will  pay 
only  about  90%  of  the  amount  due,  leaving  the  balance  until  he 
has  inspected  the  goods.  This  is  done  frequently  by  European 
importers.  But  in  the  case  of  oversea  customers  the  vendor  runs 
the  risk  of  improper  claims  and  is  not  eager  to  allow  this  limita- 
tion excepting  in  the  case  of  customers  of  irreproachable  stand- 
ing. 

Payment  after  the  goods  pass  into  the  possession  of  the  cus- 
tomer is  customary  in  the  case  of  European  and  American  firms 
buying  from  overseas. 

The  goods  are  turned  over  to  the  consignee,  he  examines 
them  and  pays  cash  within  a  short  time,  as  sanctioned  by  com- 
mercial usage.  In  the  case  of  buyers  who  are  exporters  and  who 
instruct  the  vendor  to  ship  the  goods  to  their  own  export  field, 
similarly  the  documents  are  turned  over  to  the  buyer  and  pay- 
ment is  made  shortly  afterwards. 

Such  a  practice  is  not  customary  when  selling  to  oversea 
customers,  being  limited  to  customers  of  exceptionally  strong 
standing  and  of  great  reliability.  Then  the  documents  are  turned 
over  to  the  buyer,  in  confidence  that  he  will  pay  on  receipt 
and  examination  of  goods.  In  these  cases  it  is  customary  to 
have  the  buyer  pay  by  telegraph  remittance  to  a  European  or  an 
American  bank,  or  to  accept  a  three  days  sight  draft.  In  Chapter 
XVII  we  review  the  modern  American  practice  in  the  matter  of 
terms  of  payment  with  the  help  for  the  improved  facilities  pro- 
vided by  American  banks  in  the  past  five  years. 

h)     Credit  Terms. 

A  variety  of  credit  terms  prevail  in  international  commerce. 

1.  Open  credit  consists  in  debiting  the  buyer  on  the  books 
of  the  vendor  without  any  material  guarantee  or  documentary 
acknowledgment  of  the  indebtedness.  The  invoice  value  is  en- 
tered in  the  books  as  due  on  a  certain  day.  Here  we  have  to 
distinguish  between  single  invoice  items  figuring  as  open  ledger 


CREDIT  TERMS  241 

debts  or  forming  a  part  of  an  account  current  with  a  calcula- 
tion of  interest. 

In  the  first  case  the  business  connection  between  the  con- 
tracting parties  is  either  limited  to  single  transactions,  or  only 
one  of  the  contracting  parties  supplies  the  other  with  merchan- 
dise. In  the  case  of  a  permanent  business  connection  each  in- 
dividual invoice  amount  is  considered  as  due  on  a  certain  day 
when  it  must  be  settled,  though  it  is  customary  to  ignore  slight 
time  diffrences  and  to  make  remittances  in  round  sums,  leaving 
small  balances  to  be  included  in  the  next  remittance.  Some- 
times, however,  remittances  may  be  made  irregularly,  either  in 
the  shape  of  occasional  payments  or  in  the  shape  of  miscellane- 
ous exchange  bills  which  may  accumulate  in  favor  of  the  debtor 
through  transactions  with  other  parties  to  whom  he  may  in  turn 
ship  goods.  The  account  relationship  existing  in  all  of  these 
cases  between  the  vendor  and  the  buyer  is  called  "open  account." 

In  the  case  of  open  accounts  based  on  individual  items,  it  is 
not  usual  to  charge  interest,  excepting  interest  on  delayed  pay- 
ments. The  feature  of  this  class  of  open  accounts  is  the  inde- 
pendence of  individual  items,  each  invoice  becoming  due  as  it 
matures. 

In  the  case  of  an  account  current  relationship  each  individual 
item  loses  its  independence  and  merges  in  the  account.  It  can- 
not be  sued  for  separately  or  form  the  object  of  individual  liti- 
gation. It  is  lost  in  the  balance  struck  at  certain  periods  and 
including  interest.  The  maturity  of  individual  items  is  merely 
of  importance  in  the  calculation  of  interest.  An  account  current 
relationship  is  generally  connected  with  a  contract  for  the  open- 
ing of  credit,  which  frequently  has  the  aim  of  affording  financial 
assistance.  The  basis  of  the  contract  between  the  two  parties 
is  usually  formed  by  granting  to  the  oversea  firm  a  certain  stipu- 
lated amount  as  credit  which  can  be  utilized  in  various  ways. 
One  of  the  methods  employed  is  to  enable  the  oversea  connec- 
tion to  dispose  of  funds  with  banks  in  his  vicinity  for  the  pur- 
pose of  carrying  on  his  enterprise  or  of  buying  products,  and 
the  grantor  assures  himself  by  demanding  mortgages  or  other 
security.  Or  credit  may  be  granted  merely  through  furnishing 
American  or  European  goods,  or  through  advances  on  products 
which  the  grantee  ships  from  overseas  to  Europe  or  America, 


242  INTEENATIONAL  COMMERCE 

or  permitting  the  shipper  to  draw  acceptance  drafts  on  the 
grantor  or  his  bank  in  connection  with  the  shipments  of  his  pro- 
ducts from  overseas,  or  a  negotiation  credit  may  be  opened  for 
him  with  an  oversea  bank,  available  for  his  drafts  as  attached 
to  documents.  Frequently  it  happens  that  the  oversea  trader 
procures  goods  from  the  grantor  of  credit  in  Europe  or  Amer- 
ica and  utilizes  credit  in  connection  with  his  drafts  attached  to 
the  documents  as  he  ships  to  Europe  or  America,  the  total  of 
both  means  of  utilizing  credit  being  kept  within  the  sum  of  credit 
granted.  Where  credits  are  granted  to  assist  the  oversea  ex- 
porter in  shipping  his  goods,  these  goods  are  generally  hypothe- 
cated to  the  grantor  and  as  a  rule  are  consigned  to  him.  When 
the  entire  sum  of  credit  has  been  used  up,  further  credits  can 
be  obtained  only  if  at  least  a  portion  of  debits  is  covered  by 
credits,  either  by  remittances  or  as  the  result  of  the  sale  of  con- 
signed goods.  Credit  is  then  renewed  automatically.  Such 
credit  is  limited  both  as  to  total  amount  and  frequently  as  to 
the  time  within  which  individual  items  must  be  covered  by  cor- 
responding credits.  Of  course,  in  the  account  current  relation- 
ship with  the  charging  of  interest,  the  latter  limitation  can  be 
only  approximate.  Open  credit,  either  relating  to  individual  items 
or  based  on  account  current  relationship  (here  it  is  customary 
with  exporters  and  importers  maintaining  a  buying  and  selling 
connection  with  their  oversea  business  friends,  sometimes  on  the 
basis  of  commission  and  sometimes  as  partial  partners)  is  not 
a  desirable  method  of  doing  business  at  long  range.  But  com- 
mercial usage,  or  keen  competition,  or  lack  of  adequate  banking 
connections,  or  the  existence  of  an  alliance  amounting  almost  to 
a  partnership  arrangement,  still  account  for  the  prevalence  of 
such  arrangements  between  exporters  and  importers  in  Europe 
and  America  on  the  one  hand  and  importers  and  exporters  in 
oversea  countries  on  the  other.  Manufacturers  doing  a  direct 
business  with  oversea  markets  cannot,  as  a  rule,  enter  into  such 
lelations  with  their  customers. 

2)  Credits  granted  in  international  commerce  may  be  se- 
cured by  a  documentary  acknowledgment  of  the  indebtedness 
and  by  the  subordination  of  indebtedness  under  the  strict  rules 
governing  commercial  bills.  It  is  possible  through  selling  such 
bills,  or  borrowing  on  their  security  to  obtain  cash  before  they 


CREDIT  TEEMS  243 

are  due.  The  element  of  security  is  heightened  when  the  bill 
is  accepted  by  a  third  party,  and  when  this  acceptance  is  done 
by  a  first  class  bank  the  element  of  security  attains  a  commer- 
cial maximum.     This  is  what  is  known  as  acceptance  credit. 

The  acceptance  may  be  effected  by  the  buyer  or  by  a  third 
party  for  the  buyer.  This  is  the  rule  in  oversea  commerce,  and 
particularly  in  the  importation  from  overseas  to  Europe  and 
America.  Here  the  buyer  opens  an  acceptance  credit  with  the 
drawee  for  the  vendor  authorizing  the  latter  to  draw.  In  the 
British  usage  a  somewhat  similar  method  prevails  in  the  practice 
of  buyers  to  draw  promissory  notes  to  the  order  of  the  oversea 
vendor,  which  documents  play  an  important  role  in  the  re-sale 
by  importers.  Banks  make  loans  against  them  or  buy  them  the 
same  as  acceptance  drafts. 

The  vendor  hardly  ever  disposes  of  the  funds  covered  by 
the  acceptance  until  some  time  after  the  goods  are  shipped.  But 
if  the  acceptance  credit  is  confirmed  by  a  bank,  the  vendor  is 
adequately  secured. 

On  the  whole  the  extent  of  the  security  afforded  by  the  ac- 
ceptance credit  depends  upon  the  proceedings  necessary  to  ob- 
tain the  acceptance.  Much  variation  is  encountered  in  this  re- 
spect between  European  and  American  usage  on  the  one  hand 
and  the  oversea  usage  on  the  other. 

In  sales  to  Europe  (and  also  to  importers  in  America)  it 
is  customary  to  send  the  goods  direct  to  the  buyer,  together  with 
an  invoice,  with  a  draft  attached  to  same  (the  draft  being  fre- 
quently unsigned  and  unstamped),  requesting  the  buyer  to  ac- 
cept and  to  return  it  on  receipt  and  on  the  examination  of  the 
goods.  Only  rarely  in  this  trade  the  practice  is  resorted  to  of 
having  a  bank  effect  in  behalf  of  the  buyer  the  acceptance  of 
the  draft  against  documents.  This  is  a  process  very  similar  to 
the  clause  "documents  against  acceptance,"  yet  markedly  unlike 
in  nature  from  the  point  of  view  that  the  transfer  of  documents 
is  not  equivalent  here  to  the  transfer  of  goods,  for  the  goods  here 
would  reach  the  buyer  in  any  event.  This  turning  over  of 
documents  in  the  present  instance  is  merely  a  proof  that  the 
goods  had  been  shipped,  and  the  intention  is  to  prevent  the  vendor 
from  making  a  subsequent  alteration  in  his  instructions  to  the 
carrier. 


244  INTEENATIONAL  COMMERCE 

The  drafts  in  such  sales  to  Europe  and  America  from  over- 
seas are  either  made  to  mature  on  a  certain  day  or  so  and  so 
many  months  after  the  nominal  date  of  the  draft.  The  dating 
here  is  then  of  great  importance.  In  drawing  on  Europe  and 
America  the  use  of  the  first  and  of  second  of  exchange  (commer- 
cial bills  executed  in  duplicate)  is  not  frequent. 

In  selling  to  oversea  customers,  where  acceptance  is  stipu- 
lated, the  documents  are  only  very  rarely — in  the  case  of  first 
class  customers — sent  to  the  buyer  direct,  enabling  them  to  ex- 
amine and  to  accept  the  goods  overseas  and  to  effect  acceptance 
by  a  cable  advice  to  a  bank  in  Europe  or  America. 

The  rule  is  for  the  vendor  to  draw  the  draft  and  to  hand 
it  with  documents  attached  to  a  bank  which  buys  the  draft,  or 
makes  a  loan  on  it,  or  merely  undertakes  to  collect  it,  and  it  is 
then  transmitted  for  acceptance. 

The  acceptance  may  be  effected  under  three  conditions: 

a)  Against  the  delivery  of  the  goods  after  the  inspection 
of  same  in  the  port  on  arrival  by  the  buyer  or  his  representative. 
b)  Against  the  surrender  of  the  documents  (documents  against 
acceptance,  D/A).  c)  Against  the  presentation  of  documents 
which  are  surrendered  on  the  payment  of  draft  (documents 
against  payment,  D/P). 

The  last  named  method  is  largely  employed  in  the  Far  East. 
In  its  strictest  application  it  stipulates  that  the  goods  must  be 
paid  for  not  later  than  at  the  time  of  their  arrival.  It  is  really 
a  variety  of  cash  terms,  being  cash  against  the  Bill  of  Lading. 
But  commercial  usage  in  the  Far  East  frequently  makes  a  credit 
transaction  of  it,  with  the  merchandise  itself  as  a  security,  the 
vendor,  or  his  representative,  taking  the  goods  from  the  ship, 
storing  them  and  turning  them  over  against  the  payment  of  the 
draft  a  considerable  time  after  maturity,  for  which  interest  and 
other  charges  are  debited  to  the  buyer. 

The  method  of  selling  on  the  basis  of  documents  against  ac- 
ceptance is  the  most  frequent  and  the  most  desirable.  In  all  of 
these  three  methods  the  common  characteristic  is  that  the  bank 
which  finances  the  draft  holds  the  merchandise  as  a  security 
until  the  draft  is  accepted. 

The  drafts  used  in  oversea  trade  are  either  sight  drafts  or 
are  drawn  for  certain  periods  after  sight.    Their  maturity  then 


CREDIT  TERMS  245 

depends  upon  the  date  of  their  acceptance.  Acceptance  is  ef- 
fected either  when  the  documents  arrive  (being  sent  by  mail 
they  frequently  arrive  before  the  goods)  or  when  the  goods  ar- 
rive, or  when  the  goods  are  accepted.  The  last  is  true  of  drafts 
described  in  the  foregoing  under  a) ;  the  first  is  true  of  drafts 
described  under  c).  In  principle  even  in  the  case  of  documents 
against  acceptance  the  drafts  should  be  accepted  on  the  arrival 
of  documents;  where  the  acceptance  is  effected  by  banks  this  is 
in  fact  the  rule ;  but  frequently  it  is  agreed  that  though  the  docu- 
ments arrive  before  the  merchandise,  the  draft  need  not  be  ac- 
cepted until  the  merchandise  arrives,  and  then  commercial  usage 
may  require  the  use  of  the  clause  "draft  to  be  accepted  on  ar- 
rival of  steamer  carrying  the  goods  in  port."  In  selling  to  over- 
sea countries  the  security  of  the  acceptance  and  of  payments  is 
attained  the  more  quickly,  the  sooner  the  documents  and  the 
merchandise  reach  their  destination,  for  which  reason  it  is  to 
the  vendor's  advantage  to  utilize  the  speediest  methods  of  trans- 
mission. 

It  is  customary  in  sending  drafts  to  oversea  countries  to 
make  them  out  in  several  copies,  with  copy  of  the  documents 
attached,  and  to  mail  them  by  various  routes,  to  insure  the  ar- 
rival of  at  least  one  copy. 

In  some  territories  and  lines  of  business  the  buyers  object  to 
the  acceptance  of  drafts.  This  is  particularly  true  of  South  Amer- 
ican countries  where  the  exchange  rate  is  subject  to  violent  fluc- 
tuations and  the  customers  do  not  care  to  oblige  themselves  to 
meet  a  draft  on  a  certain  day,  lest  they  may  be  called  upon  to 
effect  payments  when  the  exchange  rate  is  unfavorable.  In 
some  places  the  demand  of  an  acceptance  is  construed  as  a  lack 
of  confidence,  which  is,  of  course,  an  entirely  unwarranted  view. 
There  are  also  territories  where  the  commercial  community  has 
not  been  sufficiently  educated  to  appreciate  the  importance  of 
commercial  bills. 

As  we  have  seen  from  the  foregoing,  where  acceptance 
credit  is  granted  in  oversea  business,  the  merchandise  itself,  un- 
til the  draft  is  accepted,  forms  a  security  for  credit,  when  either 
the  documents  or  the  goods  are  turned  over  against  acceptance 
of  the  draft.  In  the  case  of  "documents  against  payment"  the 
merchandise  forms  a  security  until  complete  payment  is  effected. 


246  INTERNATIONAL,  COMMERCE 

There  are,  however,  other  ways  of  using  the  merchandise 
as  a  security,  employed  in  certain  import  centers, — the  letter  of 
lien,  or  the  letter  of  trust,  in  which  the  consignee  receives  the 
documents  or  the  merchandise  and  signs  a  declaration  that  he  does 
so  "in  trust,"  acting  as  a  custodian,  and  is  holding  them  at  the 
disposal  of  the  vendor  or  of  his  representative  (generally  a 
bank),  and  in  the  event  of  a  sale  obligates  himself  to  turn  over 
the  proceeds  immediately  to  the  vendor  or  to  his  representatives. 
Apart  from  the  consignment  business,  such  a  method  is  at  times 
employed  as  a  supplementary  security  of  credits  against  buyer's 
acceptance  to  bridge  over  the  gap  between  the  time  of  the  sur- 
render of  documents  and  either  payment  or  other  guarantee. 

Finally  merchandise  may  be  sold  with  reservation  of  the 
property  rights,  as  in  the  case  of  machinery  sold  on  time  pay- 
ments. Such  business  is  risky  because  in  many  countries  articles 
which  become  an  integral  portion  of  installations  cannot  form 
the  object  of  special  reservation  of  rights.  Still,  where  such 
business  is  done,  it  is  the  intention  of  the  contract  to  reserve  the 
right  of  ownership  for  the  vendor  until  such  time  as  all  the  pay- 
ments are  effected.  Sometimes  such  contracts  are  combined 
with  a  lease  contract,  being  in  the  nature  of  hire  purchase  con- 
tracts. Here  again  instalment  contracts  may  be  subject  to  the 
rule  of  local  laws  with  which  the  vendor  may  not  be  familiar 
and  great  care  must  be  exercised  in  this  connection. 

3)  Goods  may  be  settled  for,  finally,  by  remittances.  These 
may  be  bill  remittances,  in  which  case  the  settlement  is  effected 
by  the  buyer  drawing  drafts  on  third  parties,  with  some  future 
maturity  date,  and  indorsing  same  to  the  order  of  the  vendor. 
After  acceptance  of  same  by  the  drawee,  such  drafts  or  bills  of 
exchange  offer  the  vendor  a  greater  security  than  the  acceptance 
of  the  buyer,  for  in  addition  to  the  buyer's  liability  as  indorser 
he  has  the  additional  security  of  the  responsibility  of  the  ac- 
ceptor. Such  bills  have  the  advantage  of  facile  negotiability,  and 
the  remittance  by  means  of  bills  drawn  on  first  class  firms  and 
accepted  by  same  is  considered  equivalent  to  payment.  There- 
fore in  the  account  current  connection  the  remittance  by  such 
bills  after  discounting  is  credited  on  the  day  of  receipt.  Where 
an  account  current  relationship  does  not  exist,  such  remittances 


SPECIAL  CLAUSES  -». 

approximately  correspond  to  the  amount  and  to  the  time  when 
payment  for  merchandise  is  due. 

Goods  may  be  likewise  settled  for  by  remittances  of  mer- 
chandise. This  is  the  method  employed  by  many  oversea  con- 
cerns, when  they  first  buy  goods  on  credit  from  Europe  and 
America,  (generally  in  an  account  current  relationship),  and 
later  send  produce  to  their  creditors  to  be  sold  on  commission 
basis.  The  European  or  American  creditor  (usually  an  export 
and  import  firm)  find  an  important  guarantee  in  such  remit- 
tances. They  sell  the  goods  and  use  the  proceeds  to  cover  the 
indebtedness  of  the  consignor  or  to  extend  the  credit  granted  to 
him. 

4  Credits  may  be  lastly  secured  by  mortgages,  by  transfer 
of  claims  and  by  guarantees  of  third  parties,  but  such  methods 
are  naturally  restricted  in  use. 

In  Chapter  XVII,  while  discussing  the  credit  problem  con- 
fronting the  American  manufacturer  and  exporter,  we  will  re- 
view the  foregoing  principles  in  their  application  to  modern 
American  practice. 

9.     Special  Contract  Clauses. 
a)     Provisions  for  the  Adjustment  of  Disputes. 

The  points  of  contracts  discussed  so  far  are  subject  to  regu- 
lation by  special  agreement  as  expressed  in  contract  clauses  or 
by  commercial  usage,  in  view  of  the  fact  that  they  are  integral 
parts  of  the  sales  contract.  In  addition  to  these,  there  may  be 
special  circumstances  which  it  is  advisable  to  incorporate  in  the 
contract,  or  which  are  subject  to  commercial  usage,  though  they 
are  not  vital  parts  of  the  contract.  The  variety  of  these  precludes 
a  comprehensive  analysis  of  them,  but  we  may  single  out  as  the 
principal  among  them  the  stipulation  governing  the  settlement  of 
possible  disputes. 

International  commercial  law  is  a  somewhat  undeveloped 
entity.  But  it  is  within  the  province  of  international  law  to 
determine  the  competence  of  the  laws  of  individual  sovereign- 
ties in  international  commercial  transactions,  preventing  a  con- 
flict of  laws.    This  includes  not  only  the  statutory  and  common 


248  INTERNATIONAL  COMMERCE 

law,  but  also  commercial  usage  inasfar  as  it  acquires  legal  re- 
cognition. 

Two  principles  are  authoritative  for  the  decision  as  to  what  law 
must  apply  in  the  case  of  a  dispute  based  on  international  law : 
the  law  of  the  place  of  the  contract  (lex  loci  contractus)  and  the 
law  of  the  place  of  performance.  The  first  of  these  principles 
is  the  older  of  the  two  and  has  been  sanctioned  by  usage,  while 
the  second  begins  to  prevail  largely  in  these  latter  days. 

Parties  to  an  international  commercial  contract  subject 
themselves  to  the  observance  of  commercial  usages  and  to  the 
regulations  of  certain  commercial  associations  which  regulate 
trading  in  some  lines  of  merchandise.  They  are  equally  bound 
to  subject  themselves  to  the  laws  of  states  in  which  they  trade. 
This  acknowledgment  of  subjection  may  be  either  expressly  men- 
tioned in  a  contract  or  tacitly  understood,  in  accordance  with 
prevailing  circumstances  and  with  commercial  usage.  When  an 
agreement  exists  between  two  contracting  parties  to  subject 
themselves  to  the  jurisdiction  of  a  particular  state  (to  which 
one  or  the  other  owes  allegiance,  or  which  has  sovereign  rights 
in  the  territory  where  the  contract  object  is  located),  then  the 
conclusion  may  be  drawn  that  the  parties  agree  to  adjust  any 
disputes  leading  to  litigation  in  accordance  with  the  laws  and 
jurisdiction  of  that  state.  Similarly  where  the  two  contracting 
parties  agree  to  submit  any  arising  disputes  to  the  jurisdiction 
of  a  court  of  arbitration,  then  the  regulations  and  usages  of 
such  a  court  of  arbitration  must  prevail.  In  view  of  the  indefinite 
state  of  international  law  it  is  advisable  in  all  cases  of  important 
international  commercial  transactions  to  specify  contractually 
what  law  is  to  prevail  in  the  case  of  disputes  arising. 

Within  certain  limits  parties  to  international  sales  contracts 
have  the  right  to  agree  on  the  court  which  is  to  decide  disputes 
arising  from  the  contract,  and  even  already  existing  disputes. 
They  have  the  option  of  choosing  a  specified  official  tribunal  or 
a  court  of  arbitration.  The  plaintiff  may  be  limited  to  one  par- 
ticular court  or  have  the  choice  between  several  courts.  The 
latter  may  be  either  stipulated  directly  in  the  contract  or  indirectly 
implied  by  the  determination  of  the  place  of  the  contract  per- 
formance. The  plaintiffmay  choose  between  a  tribunal  in  the  place 
of  the  defendant's  domicile  or  he  may  sue  at  the  place  of  contract 


SPECIAL  CLAUSES  249 

performance,  where  again  several  different  courts  may  be  available. 
It  is  customary  in  some  countries  to  stipulate  in  contracts  that 
they  are  "payable  and  actionable"  at  the  place  of  the  contract 
performance.  On  the  whole  the  aim  of  each  contracting  parly 
would  be  naturally  to  subject  possible  disputes  to  the  jurisdiction 
of  his  own  country,  but  the  consideration  must  not  be  overlooked 
that  it  is  not  always  possible  to  execute  the  judgments  of  one 
country  in  another. 

In  matters  of  differences  and  disputes  relating  to  quality, 
commercial  usage  frequently  prescribes  the  submission  of  same 
to  an  expert  commission,  the  aim  of  which  is  to  preclude  the 
necessity'  of  litigation. 

With  regard  to  the  procedure,  contracting  parties  are  some- 
what limited  in  determining  same  by  contract  stipulations,  unless 
it  be  a  choice  between  several  available  procedures.  States  are 
generally  jealous  of  their  prerogative  of  prescribing  the  procedure 
for  litigation.  On  the  other  hand  agreements  to  submit  to  arbi- 
tration are  not  as  a  rule  limited  by  legislation  of  any  country 
as  to  form.  But  courts  of  arbitration,  as  instituted  by  associa- 
tions and  chambers  of  commerce,  generally  are  subject  to  their 
own  statutory  regulations  and  by-laws,  and  at  times  arbitrators 
chosen  voluntarily  reserve  the  right  of  determining  their  own 
mode  of  procedure  in  accordance  with  prevailing  commercial 
usage. 

It  is  of  importance  in  this  connection  to  determine  to  what 
extent  the  contracting  parties  may  validly  determine  that  in  dis- 
putes regarding  quality  the  opinion  of  experts  is  to  be  regarded 
as  binding  on  both  parties. 

In  many  states  such  clauses  are  not  recognized  by  official 
tribunals,  inasmuch  as  they  undertake  to  prescribe  judicial  pro- 
cedure in  the  matter  of  evidence,  but  the  prevailing  commercial 
usage  is  to  regard  contract  stipulations  providing  that  questions 
of  equality  be  settled  by  the  opinion  of  experts,  as  indicated  in 
the  contract,  a  legitimate  agreement,  binding  on  both  parties,  and 
a  proper  provision  for  the  conclusion  of  the  business,  for  the  ac- 
ceptance of  the  goods  and  the  calculation  of  prices,  and  not  as 
an  attempt  to  dictate  judicial  procedure. 

Where  it  is  agreed  that  the  buyer  cannot  bring  up  any 


250  INTERNATIONAL  COMMERCE 

claims  if  the  goods  are  accompanied  by  an  inspection  certificate 
of  the  sort  agreed  upon,  and  the  certificate  specifies  that  the 
qoods  are  in  accord  with  the  contract,  then  the  buyer  is  con- 
tractually obliged  to  accept  the  goods  and  to  pay  for  them.  This 
is  particularly  true  of  cases  when  not  only  the  buyer  is  obliged 
to  acknowledge  the  certificate,  but  the  vendor  is  obliged  to  pres- 
ent one.  Thus  goods  accompanied  by  certificates  can  properly 
form  the  basis  of  contracts. 

Likewise  in  cases  where  it  is  agreed  that  goods  not  corres- 
ponding in  quality  with  the  contract  must  be  settled  for  on  the 
basis  of  an  expert  opinion,  the  vendor  re-imbursing  the  buyer  for 
any  inferiority  or  shortage  (in  content),  and  the  buyer  re-im- 
bursing the  vendor  in  the  case  of  superior  quality  or  excess  (of 
content),  we  have  merely  a  contractual  agreement  as  to  the  man- 
ner of  calculating  the  final  cost  of  the  merchandise.  Even  where 
an  expert  opinion  procured  in  accordance  with  the  contract  rules 
that  the  goods  are  not  in  accord  with  the  contract  and  need 
not  be  accepted,  we  have  in  the  expert  opinion  merely  the  real- 
ization of  a  contract  clause  which  prevents  the  forming  of  an 
obligation  on  the  part  of  the  buyer  to  accept  the  goods  rather 
than  a  juridical  evidence  of  their  lack  of  accord  with  the  con- 
tract. 

Contractual  agreements  of  this  character  are  very  common 
in  international  commerce  and  it  is  not  good  policy  in  any  coun- 
try to  withhold  judicial  recognition  from  them,  because  of  their 
great  importance  in  international  commerce  and  their  recognition 
by  commercial  usage. 

b)     The  Annulment  and  Cancellation  of  Contracts. 

Apart  from  mutual  subsequent  agreement,  contracts  may  be 
annulled  or  cancelled  either  automatically  (through  legal  regu- 
lations, through  contract  stipulations,  or  through  commercial 
usage),  or  unilaterally  through  one  of  the  contracting  parties 
exercising  his  right  to  withdraw.  Annulment  or  cancellation 
may  be  based  on  culpable  or  erroneous  actions  of  one  of  the  two 
contracting  parties,  on  the  occurrence  of  certain  events,  on  the 
right  of  one  contracting  party  to  bring  about  the  annulment  of 
his  own  free  will. 


CONTRACT  ANNULMENT  251 

The  culpable  behavior  of  one  of  the  contracting  parties 
generally  creates  a  unilateral  right  to  withdraw  from  the  con- 
tract as  far  as  the  other  contracting  party  is  concerned.  This 
may  include:  the  vendor's  default  in  delivery;  the  delivery  of 
defective  goods,  the  buyer's  default  in  payment,  provided  the 
goods  have  not  yet  passed  into  the  buyer's  possession  or  at  least 
the  purchase  price  has  not  yet  been  credited.  In  the  case  of 
goods  sold  with  the  rights  of  property  still  vesting  in  the  vendor, 
even  these  last  two  provisos  do  not  hold.  On  the  basis  of  error, 
a  party  to  a  contract  who  was  mistaken  about  important  fea- 
tures of  the  contract  can  dispute  the  validity  of  the  contract. 

Events  occurring  after  the  conclusion  of  the  contract  which 
may  lead  to  the  cancellation  of  the  contract  include  the  dete- 
rioration of  the  buyer's  financial  standing,  occurrences  which 
prevent  shipping,  provided  the  vendor  is  not  in  default ;  circum- 
stances which  make  the  attainment  of  the  business  aim  or  of 
a  business  profit  impossible  (export  restrictions,  force  majeure, 
etc.)  ;  finally  total  loss  of  the  shipment  (wreck  at  sea)  or  a  ma- 
terial deterioration  of  the  shipment. 

In  the  case  of  circumstances  which  make  the  attainment  of 
the  business  aim  or  a  profit  impossible,  the  contract  is  regarded 
as  cancelled  only  if  this  is  expressly  provided  for  in  the  con- 
tract. 

Contract  clauses  frequently  state  that  alterations  in  certain 
circumstances,  as  for  instance  the  increase  of  shipping  expenses 
to  the  detriment  of  the  party  who  is  bound  to  bear  them,  shall 
not  lead  to  a  cancellation  of  the  contract.  Altered  circumstances 
may  form  the  basis  of  special  contract  stipulations.  Such 
altered  circumstances  may  relate  to  a  deterioration  in  the  finan- 
cial standing  of  the  buyer,  and  then  it  is  sometimes  customary, 
instead  of  cancelling  the  contract,  first  to  demand  payment  from 
the  buyer,  and  to  consider  the  contract  annulled  only  when  pay- 
ment is  denied. 

Where  one  of  the  contracting  parties  is  given  the  contractual 
right  to  withdraw  from  the  contract  of  his  own  volition,  he  gen- 
erally has  to  pay  a  forfeit  or  a  conventional  fine.  Finally  the 
buyer  or  the  vendor  may  become  insolvent,  which  in  commercial 
usage  entitles  the  other  contracting  party  to  withdraw  from  the 
contract. 


252  INTEENATIONAL  COMMERCE 

The  withdrawal  from  the  contract  ordinarily  necessitates 
the  return  of  the  portions  of  the  contract  already  performed, 
where  this  is  possible,  and  likewise  an  economic  annulment  of 
the  effects  of  the  contract  as  far  as  both  parties  are  concerned. 
Or,  as  indicated  by  forfeits  and  conventional  fines,  other  modes 
may  be  agreed  upon. 

c)     Miscellaneous  Stipulations  Regarding  the  Per- 
formance of  Contracts. 

Miscellaneous  stipulations  regarding  the  performance  of 
contracts  may  include  the  right  of  transfer  of  contract  to  third 
parties.  This  must  be  either  stipulated  in  the  contract  or  per- 
missible by  commercial  usage.  It  is  generally  the  right  of 
the  buyer,  for  the  vendor's  part  in  the  performance  is  as  a  rule 
individual.  The  transfer  is  effected  either  by  endorsement  or  by 
assignment,  on  the  basis  of  the  original  documents.  The  endorser 
or  assignor  may  be  liable  to  the  endorsees  and  assignees  or  to 
the  second  party  to  the  original  contract  or  not. 

The  two  contracting  parties  may  agree  that  in  the  place  of 
the  actual  transfer  of  goods  a  settlement  may  be  made  at  the 
time  when  the  contract  performance  is  due  on  the  basis  of  the 
difference  between  the  contract  price  and  the  market  price  then 
prevailing. 

The  endorsement  or  assignment  to  third  parties  is  not  such  a 
substitution,  even  if  the  endorser  or  assignor  instead  of  transfer- 
ring the  goods  to  the  endorsee  or  assignee  effects  a  settlement 
on  the  basis  of  a  price  difference,  transferring  his  contract  gen- 
erally against  a  consideration. 

Additional  obligations  supplementary  to  the  principal  obliga- 
tions may  include  the  obligation  on  the  part  of  the  vendor  of 
machinery  to  operate  the  same  for  demonstration  purposes,  or 
on  the  part  of  the  vendor  of  various  classes  of  goods  to  assist  the 
buyer  in  a  publicity  campaign.  It  may  be  stipulated  that  the 
vendor  is  obligated  to  reserve  the  sale  of  certain  articles  for  a 
given  territory  exclusively  to  the  buyer.  Or  vice  versa  that  the 
buyer  is  obligated  to  buy  certain  articles  exclusively  from  the 
vendor. 


Sundry  contract  clauses  253 

The  vendor  may  be  obligated  in  the  case  of  marketing  cer- 
tain articles  in  the  future  to  give  the  buyer  the  right  of  refusal 
or  the  first  choice  at  a  stipulated  price. 

Failure  to  fulfill  these  miscellaneous  supplementary  con- 
tract obligations  has  not  the  same  effect  as  ordinary  default,  but 
entitles  the  injured  party  merely  to  damages,  unless  other  con- 
sequences are  provided  for  in  the  contract. 


CHAPTER  XIII. 

Special  Types  of  International  Sales  Contracts. 

A.    tpie  indent  business  WITH  ASIATIC  customers. 

a)  General  Remarks. 

Indent  business  in  the  broad  sense  of  the  term  is  prevalent 
in  the  Far  East,  in  India  and  Australia.  It  is  essentially  an  im- 
port business  from  the  point  of  view  of  these  territories.  It  con- 
sists in  the  acceptance  by  an  importer  in  the  Far  East,  in  India 
or  in  Australia,  or  by  an  exporter  in  Europe  or  America,  of  an 
order  to  furnish  specified  goods.  Since  the  supply  of  these  goods 
is  conditioned,  as  a  rule,  on  a  specified  price,  and  the  party  who 
accepts  the  order  is,  as  a  rule,  obliged  to  purchase  the  goods  after 
receiving  the  order,  he  naturally  aims  to  keep  himself  free  from 
any  definite  obligations  until  he  has  secured  the  goods  at  a  price 
leaving  him  a  reasonable  profit,  though  in  doing  his  "shopping" 
he  is  sure  of  his  own  customer  and  of  his  sales  price. 

Indent  business  in  the  strict  sense  of  the  term  provides  the 
seller  with  a  customer,  assures  him  a  certain  sales  price  and  cer- 
tain sales  conditions,  but  leaves  him  free  to  enter  into  a  bind- 
ing contractual  relationship  with  the  customer  at  a  later  time. 
This  business  originated  in  India  and  has  spread  to  Zanzibar  and 
East  Africa  on  the  one  hand  and  to  the  Far  East  on  the  other. 
It  generally  marks  business  relations  between  European  and 
American  exporters  and  Asiatic  wholesalers.  It  has  assumed 
certain  definite  types  which  are  discussed  below. 

The  word  "indenf  means  a  cut  or  notch  in  the  margin,  and 
hence  it  was  applied  to  documents  or  contracts  separated  from 
the  original  by  tearing  through  along  an  indented  line,  in  order 
to  identify  them.  In  England  the  word  "indent"  has  attained 
in  loose  usage  a  meaning  almost  equivalent  to  order,  and  covers 
practically  all  orders  from  overseas  which  are  sent  to  an  ex- 
porter, though  in  its  stricter  application  the  term  "indent"  is  even 


...  256 

in  England  applied  specifically  to  orders  from  native  merchants 
in  the  territories  mentioned  above. 

The  acceptance  of  indent  orders  may  be  on  the  basis  of  deal- 
ings for  the  exporter's  own  account  or  as  a  purchase  on  com- 
mission basis.  The  former  is  the  more  prevalent  method,  and 
the  tendency  is  increasingly  in  that  direction.  This  is  only  ra- 
tional, for  it  is  against  good  usage  and  commercial  common 
sense  in  purchasing  on  commission  basis  to  limit  the  commis- 
sioner to  a  price  determined  in  advance  and  fixed  in  the  order. 
This  may  be  done  in  cases  where  the  buyer  has  binding  offers 
on  hand,  or  the  price  indicated  may  merely  mean  a  limit  beyond 
which  the  commissioner  is  not  supposed  to  go  in  placing  the  pur- 
chase. Ordinarily,  however,  the  indent  names  the  price  which 
the  buyer  is  agreed  to  pay,  thus  leaving  it  to  the  exporter  accept- 
ing the  indent  to  place  his  purchase  on  the  basis  of  a  price  yield- 
ing him  a  certain  profit.  It  may  be  said,  therefore,  that  as  a 
rule  the  exporter  receiving  an  indent  from  an  Asiatic  merchant 
buys  the  goods  ordered  for  his  own  account,  and  not  on  com- 
mission basis. 

This  is  particularly  indicated  in  the  fact  that  the  Asiatic 
customer  must  have  quotations  on  a  entirely  different  basis  from 
those  received  by  the  exporter  from  his  source  of  supply.  The 
buyer  must  have  quotations  cif.,  and  in  fact  "free  godown,"  pre- 
ferably in  English  or  Indian  currency,  whereas  the  exporter  buys 
either  at  factory  or  fob.  port  of  shipment.  The  exporter  cannot 
undertake  to  combine  freight  and  insurance  calculations  and  ex- 
change fluctuations  with  purchasing  for  his  Asiatic  customer 
strictly  on  commission  basis,  and  can  cover  himself  only  if  be- 
tween the  price  basis  of  the  indent  purchaser  and  his  own  costs 
there  exists  a  sufficient  margin. 

In  practice,  the  indentor  has  the  advantage  of  a  fixed  price 
as  a  basis  of  his  calculations,  the  indent ec  has  the  choice  of  ac- 
cepting the  business,  if  the  price  permits  him  to  place  his  own 
purchase  with  a  sufficient  profit  margin,  or  of  rejecting  it. 

It  happens  relatively  seldom  that  the  receipt  of  the  indent 
coincides  with  a  definite  obligation  to  furnish  the  goods.  This 
is  the  case  when  the  indentor  has  on  hand  firm  quotations  from 
the  indentee.  But  the  indentor  is  immediately  bound  by  his  in- 
dent. 


256  INTERNATIONAL  COMMERCE 

This  represents  a  certain  anomaly  in  contracts  from  the 
point  of  view  of  law.  Does  the  receipt  of  the  indent  indicate 
the  existence  of  a  contract  or  merely  a  proposition  from  the 
buyer  which  is  effective  only  through  acceptance?  As  we  will 
see  below  in  examining  the  form  and  the  contents  of  the  indent, 
we  may  say  that  in  Far  Eastern  indents  the  receipt  of  the  in- 
dent is  an  immediate  conclusion  of  a  purchase  in  which  the 
vendor  stipulates  time  for  consideration,  whereas  in  Indian  in- 
dents we  have  the  receipt  of  a  request  to  buy,  which  assumes  the 
form  of  a  firm  purchase  when  the  indentee  signifies  his  willing- 
ness to  furnish  the  goods.  But  even  in  the  latter  case  the  in- 
dentee, through  commercial  usage,  has  the  benefit  of  a  reason- 
able time  to  signify  his  agreement,  while  the  indentor  has  no 
right  to  withdraw.  Indents  under  seal  are  considered  irrevoc- 
able. Only  when  the  indentee  expressly  declines  the  indent  or 
fails  to  indicate  his  acceptance  within  a  more  or  less  definite 
space  of  time,  is  the  indentor  released  from  his  obligation  to 
abide  by  his  indent. 

The  acceptance  of  the  indent  is  effected  without  formalities. 

An  exchange  of  letters  or  memoranda  is  customary  in 
Australia  and  Hongkong;  in  the  Indian  trade,  where  the  indent 
is  given  to  a  European  importer  (or  the  resident  representative 
of  a  European  exporter),  it  is  sometimes  customary  for  the  in- 
dentor to  sign  an  entry  in  the  vendor's  indent  book.  Very  large- 
ly special  indent  forms  are  used.  Here  we  distinguish  the  Indian 
indent  form  from  the  Far  Eastern. 

The  Indian  indent  form  is  the  more  common,  and  it  is  fre- 
quently used  even  in  the  Far  East  trade.  The  indentee  fills  out 
an  indent  form  with  the  details  of  the  order,  the  indentor  signs 
it  and  retains  a  duplicate.  It  is  then  a  commission  signed 
by  the  indentor  and  addressed  to  the  indentee  instructing  him 
to  buy  certain  goods.  The  indentee,  who  is  an  independent  im- 
porter of  European  or  American  nationality,  issues  an  order  at 
a  price  determined  by  himself  and  sends  it  to  the  manufacturer 
or  the  exporter  from  whom  he  intends  to  buy  the  goods.  The 
representative  or  the  branch  of  the  European  or  American  ex- 
port firm  sends  a  second  indent  copy  to  the  home  office.  Some- 
times the  indent  is  telegraphed. 

The  notice  of  the  acceptance  ("accepted"  or  "placed")  or 
the  rejection  ("refused"  or  "cancelled)"  of  an  indent  is  received 


INDENTS 

by  the  indentor  in  the  shape  of  a  so-called  report,  which  a»  a 
rule  is  not  signed  by  the  vendor,  but  appears  in  the  form  of  a 
memorandum. 

In  the  Far  East  trade,  however,  it  is  customary  to  use  forms 
marked  "Contract,"  indicating  the  existence  of  a  purchase  con- 
tract, and  these  forms  are  made  out  in  duplicate  even  where  the 
vendor  has  not  yet  agreed  to  supply  the  goods.  The  contracts 
are  pasted  together  and  separated  along  an  indented  line,  each 
contracting  party  retaining  the  copy  signed  by  the  other.  Cabled 
indents  from  the  Far  East  are  likewise  frequent.  No  indent 
copies  are  exchanged  but  independent  contracts  are  made  with 
the  source  of  supply  in  Europe  or  America.  The  indentee  in  the 
Far  East  trade  can  bind  himself  practically  without  loss  of  time 
after  an  exchange  of  cablegrams  with  the  source  of  supply. 
Then  the  contract  between  the  indentee  and  the  indentor  assumes 
a  definite  form,  either  by  a  written  declaration  which  the  in- 
dentee sends  to  the  indentor  or  by  means  of  a  new  contract,  this 
time  minus  the  clause  "subject  to  approval  by  cable  or  letter 
within days." 

On  the  basis  of  the  indent  price  the  indentee  must  calculate 
the  price  which  he  can  pay  for  his  source  of  supply.  If  the 
source  of  supply  demands  a  higher  price  then  the  indentee  must 
demand  a  higher  price  from  the  indentor.  This  is  in  effect  a 
refusal  of  the  indent  which  frees  the  indentor  from  obligation. 
A  repeated  exchange  of  cables  or  letters  is  frequently  necessary 
before  through  successive  raises  of  the  indent  prices  and  re- 
ductions of  the  prices  from  various  sources  of  supply  (by  util- 
izing competition)  a  definite  basis  for  the  conclusion  of  the  in- 
dent transaction  is  reached. 

The  peculiarity  of  the  indent  business  is  that  it  assures  the 
vendor  of  his  buyer  but  does  not  bind  the  vendor,  and  the  competi- 
tion between  importers  and  local  representatives  of  European 
and  American  exporters  leads  many  of  them  to  accept  indents 
at  unreasonably  low  prices  subject  to  approval  by  cable  or  letter. 
The  aim  is  to  bind  the  buyer.  The  economic  effect  of  this  is  that 
nowhere  are  prices  so  subject  to  pressure  through  competition 
than  where  the  indent  business  has  taken  deep  root.  And  while 
this  method  was  adopted  by  European  merchants  for  the  protec- 
tion of  their  own  interests,  it  is  in  fact  the  native  buyer  who 
now  derives  most  benefit  from  it. 


258  INTERNATIONAL  COMMEKCE 

In  accordance  with  the  basic  idea  of  indents  in  dealing  with 
Asiatic  customers  the  entire  text  of  these  forms  is  intended  to 
bind  the  buyer  as  strictly  as  possible  and  to  cut  off  any  chances 
of  evasion  on  his  part,  as  well  as  to  provide  for  a  quick  settle- 
ment of  any  differences  with  the  fullest  protection  for  the 
vendor.  On  the  other  hand  the  aim  of  the  various  clauses  is  also 
to  leave  as  much  freedom  and  scope  to  the  vendor,  to  release 
him  as  far  as  possible  from  responsibility  and  obligations  and  to 
limit  the  annoying  consequences  of  non-performance  or  faulty 
performance.  The  justification  of  European  merchants  in  adopt- 
ing such  an  attitude  towards  Asiatic  customers  lies  in  the  tradi- 
tional unreliability  and  trickiness  of  many  Asiatic  traders  and  in 
their  tendency  to  impose  demands  for  subsequent  concessions  as 
the  result  of  baseless  fault-finding.  This  last  named  tendency  is 
particularly  prevalent  in  India  where  the  indent  forms  are  there- 
fore far  more  lavishly  furnished  with  safeguarding  clauses  than 
in  the  Far  East.  But  even  here  European  merchants  are  no 
longer  able  to  impose  their  will  in  safeguarding  their  interests. 
The  tendency  towards  national  emancipation  noticeable  in  India 
has  also  led  to  the  attainment  of  an  ever  increasing  degree  of 
commercial  emancipation  on  the  part  of  the  native  traders.  They 
have  organized  powerful  associations  such  as  the  Bombay  Native 
Piece  Goods  Merchants  Association,  and  the  balance  of  power 
is  slowly  shifting  to  the  native  trader.  Characteristic  in  this  re- 
spect is  a  list  of  indent  stipulations  compiled  by  this  Association 
and  sent  to  all  European  and  American  importers  in  India  (in- 
cluding representatives  of  European  and  American  exporters) 
and  notifying  them  that  the  members  of  the  association  would 
henceforth  buy  exclusively  on  the  basis  of  these  approved  indent 
terms. 

In  connection  with  the  tendency  of  the  indentee  to  free  him- 
self from  obligations  as  far  as  possible  lies  the  danger  of  losing 
the  character  of  merchant  for  own  account,  in  the  absence  of 
an  obligation  to  supply  goods.  Anglo-Indian  courts  have  fre- 
quently ruled  in  specific  cases  that  a  commission  relationship 
existed  between  the  indentee  and  the  indentor  and  forced  the  in- 
dentee to  refund  to  the  indentor  the  difference  between  their 
profit  and  the  usual  commission,  because  in  the  letter-head  the 
indentee  used  the  style  of  "commission  agent"  or  "commissioner" 
either  in  addition  to  "merchant"  or  in  place  of  "merchant." 


INDIAN  INDENTS  259 

b)     The  Indian  Indent. 

Besides  the  date  the  Indian  indent  has  always  an  indent 
number  and  usually  is  provided  with  a  codeword  for  cable  re- 
ference to  the  business  of  each  separate  indent.  The  indent  is 
addressed  to  the  vendor,  who  must  buy  the  goods  ordered  for 
ihe  indentor.  It  is  usually  kept  in  the  form  of  a  letter.  It  com- 
mences generally  after  this  fashion:  "I  commission  you  to  pur- 
chase for  me,"  or  "I  commission  you  to  order  for  me."  When 
the  indent  is  taken  by  the  representative  of  a  European  or  an 
American  export  firm  it  reads :  "I  authorize  you  to  instruct  your 
constituents  in to  purchase."  This  form  of  a  commis- 
sion or  authorization  to  purchase  does  not  conflict  per  se  with 
the  idea  that  the  firm  commissioned  or  authorized  to  purchase 
acts  for  its  own  account.  The  purchasing,  indeed,  is  done  after  the 
buyer  has  expressed  his  will.  But  the  principal  thing  is  that  the 
indentee  enters  into  relations  with  the  buyer  as  an  independent  con- 
tracting party  assuming  an  independent  obligation.  To  emphasize 
this  it  is  advisable  to  leave  out  the  formula  which  is  otherwise 
usual  in  indents  after  the  words  "to  purchase"  or  "to  order" — 
"on  my  account  and  risk."  This  last-named  formula  leads  to 
the  construction  of  a  commission  relationship.  The  formula  "to 
ship  on  my  account  and  risk,"  however,  has  an  entirely  different 
significance.  A  favorite  formula  which  does  not  emphasize  the 
instructions  to  order  or  to  purchase  is  "Please  forward  this  in- 
dent to with  instructions  to  ship,  if  practicable,  on 

my  account  and  risk."  The  character  of  the  indentee  as  mer- 
chant for  his  own  account  is  expressed  clearly  in  the  indent  form 
reading :  "I  hereby  agree  to  purchase  from  you  the  whole  or  part 
of  the  undermentioned  goods." 

Almost  any  indent  contains  the  clause  "the  whole  or  any 
part  thereof."  This  permits  the  indentee  to  furnish  either  the 
entire  quantity  of  the  goods  ordered  or  a  reasonable  portion 
thereof.  The  indentor  is  bound  even  in  the  case  of  partial  ex- 
ecution. 

The  tendency  of  inducing  the  indentee  to  express  acceptance 
or  refusal  within  reasonable  time  is  indicated  in  the  growing  use 
of  such  clauses  as  "wire  acceptance,"  or  "reply  within  50  or  60 
days"  or  "order  valid  three  weeks  after  arrival  of  indent  in 
Europe  or  America."    Commercial  usage,  where  no  stipulation  is 


2(50  INTERNATIONAL  COMMERCE 

made,  indicates  four  weeks  after  arrival  of  indent  ag  the  time 
limit  for  acceptance  or  refusal. 

The  time  of  performance  as  far  as  the  vendor  is  concerned 
is  indicated  in  the  time  of  shipment.  In  many  indents  under 
"shipment"  is  understood  inland  shipment  from  factory  or  ware- 
house en  route  to  the  port  of  shipment. 

With  regard  to  shipment  indents  generally  specify  "as  soon 
as  possible."  Commercial  usage  limits  this  to  a  maximum  of  six 
months.  It  is  increasingly  customary  to  specify  a  more  or  less 
definite  time  of  shipment,  generally  within  so  and  so  many 
months  from  acceptance  of  the  indent,  but  it  is  usual  to  bind  the 
buyer  to  accept  the  goods  without  fault-finding  even  if  the  ship- 
ment is  effected  two  weeks  sooner  or  later.  It  is  usual  in  indents 
for  the  vendor  to  exclude  responsibility  in  the  case  of  force 
majeure  or  any  delays  beyond  his  control,  such  as  lack  of  cargo 
space,  etc.  The  force  majeure  clause  is  interpreted  most  liber- 
ally. Strikes  in  factories  where  the  goods  are  bought,  railway 
embargoes,  default  by  the  manufacturer,  etc.,  excuse  the  in- 
dentee.  But  the  Bombay  Piece  Goods  Merchants'  Association 
has  in  its  model  conditions  of  contract  greatly  curtailed  the  scope 
of  the  indentee  in  this  regard. 

In  the  case  of  delays  in  delivery  the  indentor  must  frequent- 
ly content  himself  with  the  right  to  cancel  the  contract  or  to  agree 
to  a  later  delivery,  but  he  cannot  insist  on  later  delivery.  The 
right  of  cancellation  on  the  plea  of  delayed  shipment  is  frequent- 
ly limited  in  time,  as  for  instance  three  days  after  receipt  of  in- 
voice. 

The  risks  of  shipment  are  always  to  the  burden  of  the  buyer. 
The  clauses  in  this  connection  are  "to  ship  on  my  account  and 
risk"  or  "all  risks  of  the  voyage  for  my  account."  After  arrival 
at  the  port  of  destination  the  goods  remain  at  the  risk  of  the 
buyer.  Commercial  usage  causes  the  vendor  to  insure  the  goods 
for  transportation  and  in  sales  ex  godown  for  the  warehousing 
periods  for  a  sum  10%  in  excess  of  the  invoice  value.  The 
vendor  also  expressly  declines  all  consequences  of  mutilations 
of  cablegrams. 

Even  where  the  invoice  does  not  accurately  correspond  with 
the  order,  the  indentor  is  obliged  to  accept  the  goods  and  to  make 
payment  before  he  can  satisfy  himself  by  an  inspection  of  the 
goods  whether  shipment  was  effected  correctly.    In  former  years 


INDIAN  INDENTS  261 

the  indentor  was  obliged  to  accept  the  vendor's  draft  against 
documents  and  to  pay  even  before  maturity  if  the  goods  arrived 
in  the  meanwhile.  In  recent  years  a  certain  mitigation  has  taken 
place  and  frequently  the  documents  are  surrendered  against  ac- 
ceptance of  the  draft  by  the  indentor. 

The  indentor  has  the  right  to  bring  claims  on  account  of 
defects  generally  within  two  weeks  after  the  arrival  of  goods, 
and  it  is  frequently  stipulated  that  any  claims  not  regulated  with- 
in a  month  after  arrival  are  regarded  as  outlawed. 

In  the  case  of  differences  a  survey  by  arbitration  or  sworn 
experts  is  customary.  English  usage  prevails  in  this  connection. 
Each  party  selects  an  arbitrator,  and  if  these  do  not  agree,  an 
umpire  is  chosen.  The  native  indentor  is  generally  obliged  to 
select  a  European  as  arbitrator.  Or  the  choice  of  the  arbitrator 
is  subject  to  the  approval  by  the  indentee  or  his  consulate. 

The  indentee  has  often  the  right  to  avoid  arbitration  by  re- 
funding payments  to  the  buyer  and  taking  possession  of  the 
goods.  Commercial  usage  compels  the  buyer  to  accept  the  goods 
if  the  shipment  is  10%  inferior  in  quality,  against  the  reimburse- 
ment of  the  difference.  In  piece  goods  the  difference  must  no' 
exceed  5%.  Otherwise  he  has  the  right  to  refuse  acceptance. 
Occasionally  the  indent  stipulates  that  the  indentor  is  not  entitled 
to  bring  any  claims  until  he  has  paid  in  full.  The  Bombay  Piece 
Goods  Merchants'  Association  declines  this  stipulation.  In  suc- 
cessive shipments  it  is  stipulated  that  each  shipment  must  form 
a  separate  contract. 

Indents  generally  provide  stringent  regulations  in  the  case 
the  indentor  does  not  fulfill  his  obligations  in  due  time. 

Almost  all  indents  provide  that  if  the  buyer  is  in  default,  the 
indentee  has  the  right  to  auction  off  the  goods  without  notifying 
him.  The  indentor  is  liable  to  the  indentee  for  any  loss  and  costs, 
for  interest  on  delayed  payments,  and  even  for  commissions. 

In  view  of  the  stringent  provisions  of  the  Indian  Merchan- 
dise Marks  Act  the  indentor  is  held  responsible  for  any  conse- 
quences arising  through  the  use  of  marks,  labels,  symbols,  etc., 
prescribed  by  him.  His  obligation  to  pay  the  import  duties  is 
also  insisted  upon. 

Characteristic  of  the  attitude  of  foreign  merchants  to  the 
Indian  traders  is  the  prevailing  clause  that  anything  written  in 
the  indent  in  native  characters  is  to  be  considered  invalid. 


262  INTERNATIONAL  COMMERCE 


Specimen  of  an  Indian  Indent. 

INDENT. 

Indent  No.  1236.  May  10,  1919. 

Codeword  ITINERANT. 

From  Messrs.  Rustomjee  &  Co.,  Bombay. 

To  Messrs.  John  Doe  &  Co., 

New  York,  Bombay,  London. 

1.  I/we  hereby  request  you  to  purchase  and  ship  on  my /our  account 
and  risk  the  whole  or  any  portion  of  the  following  goods  at  the  prices 
specified:  This  Indent  to  remain  in  force  for  3  weeks  after  its  receipt 
at  NEW  YORK.  Your  telegram  accepting  this  order  shall  be  subject  to 
confirmation  by  letter  as  regards  correctness  of  details.  Any  refusal  by 
wire  to  place  the  order  at  limits  fixed  may  be  set  aside  within  3  days 
should  you  be  able  to  place  the  order  meanwhile.  If  the  limits  given  are 
subsequently  increased  or  the  Indent  is  referred  back  for  confirmation, 
the  time  for  shipment  shall  be  deemed  to  be  increased  by  the  number 
of  days  in  which  the  delay  is  caused,  unless  otherwise  stipulated.  For 
any  bonus  or  allowance  made  by  Manufacturers  I/we  shall  have  no  claim. 
Remarks  made  on  samples  on  which  the  Indents  are  based  shall  be  taken 
as  a  part  of  this  Indent.  All  risk  of  voyage,  sea-damage,  breakage  and 
leakage  will  be  on  my/our  head.  2.  I/we  agree  to  accept  your  Invoice 
of  the  purchase  made  as  correct  without  further  proof,  and  to  accept  on 
presentation  and  pay  at  maturity  the  draft  drawn  for  the  Invoice  value 
with  all  charges  and  interest.  No  objection  or  dispute  shall  be  raised 
by  me/us,  as  to  quality  or  damage  or  otherwise  unless  the  draft  is  first 
accepted  and  paid  by  me/us.  3.  In  default  of  my  accepting  or  paying 
the  draft  at  maturity  I/we  agree  to  pay  you  the  value  of  the  said  goods 
at  their  Invoice  value  together  with  interest  and  all  charges  as  for  goods 
bargained  and  sold  to  me/us.  I/we  also  authorize  you  to  resell  the  said 
goods  at  your  option  by  public  or  private  sale  on  my/our  account  and 
risk,  and  agree  to  pay  to  you  any  loss  or  deficit  together  with  all  in- 
terest and  charges,  and  your  commission  at  5%  per  cent,  on  such  resale, 
waiving  all  claims  to  profit  or  surplus.  Your  account-sale  for  such  resale 
will  be  accepted  as  correct.  4.  When  goods  under  any  indent  are  to  be 
sent  in  several  shipments,  each  shipment  shall  be  treated  as  a  separate 
contract.  Any  default  in  sending  any  installments  at  the  stipulated  time 
shall  not  entitle  me/us  to  reject  all  the  shipments,  but  you  are  at  liberty 
to  tender  any  shipment  that  has  arrived  at  the  proper  time  under  any 
of  the  stipulated  installments.  "Shipment"  of  goods  shall  include  Rail- 
way Receipt  or  Carrier's  Receipt.  Time  allowed  for  shipment  shall  run 
from  the  date  of  acceptance  of  Indent.  Any  shipment  containing  a 
smaller  or  larger  quantity  than  that  ordered  will  be  accepted,  provided 
in  the  case  of  larger  quantity:    the  Indentor  will  be  given  the  stipulated 


INDIAN   INDENTS  203 

quantity  only,  or  payment  for  the  same.  Shipment  made  within  14  days 
of  the  time  stipulated  shall  be  accepted.  If  there  is  no  steamer  availablo 
within  the  stipulated  time  so  extended  by  14  days,  at  the  port  of  ship- 
ment the  goods  may  be  shipped  by  the  next  available  steamer.  Ship- 
ments made  before  the  stipulated  time  will  be  accepted  provided  interest 
be  only  charged  as  if  the  goods  had  been  shipped  in  proper  time.  No 
objection  to  be  made  for  delays,  caused  by  strikes,  riots  or  accidents, 
and  for  late  delivery  &  non  delivery  of  goods  owing  to  Manufacturer's 
default,  or  of  Force  Major.  5.  No  dispute  shall  be  raised  or  claims 
made  unless  notice  of  difference  of  quality,  or  quantity  or  colour  or  any 
damage  to  goods  shall  be  given  within  8  days  of  their  arrival  by  steamer. 
All  such  disputes,  if  made  within  the  said  8  days;  shall  be  referred  to 
one  or  two  European  Merchants  (one  to  be  selected  by  each  side)  ap- 
proved of  by  you  or  by  the  Committee  of  the  Bombay  Chamber  of  Com- 
merce, and  the  decision  of  the  Arbitrators,  or  their  Umpire,  if  any,  shall 
be  final  and  binding.  The  losing  party  to  pay  the  survey  fee.  You  are 
at  liberty,  before  or  after  calling  a  survey  to  refer  the  dispute  to  your 
Head  firm  in  New  York  for  settlement;  or  to  take  up  the  goods  and 
cancel  the  Indent  on  refunding  to  me/us  the  amount  of  the  draft  if  paid 
by  me.  6.  INSURANCE:  The  goods  are  to  be  insured  as  usual  for  the 
voyage  and  also  while  they  are  at  the  Docks  if  so  asked,  and  I/we  agree 
to  pay  for  the  Insurance  charges.  In  any  event  the  goods  will  be  at 
my/our  risk  from  the  date  of  shipment  till  delivery.  In  the  case  of 
Glassware  you  are  not  responsible  for  breakage.  In  the  case  of  Insur- 
ance against  War  Risk  additional  premium  to  be  borne  by  me/us.  7.  For 
all  orders  for  Japan  goods  I/we  do  not  hold  you  responsible  for  dif- 
ference in  quality  shape  size  packing  &  shipment  time  whatsoever. 
8.  Any  writing  in  vernacular  in  addition  to  my  own  signature  shall  have 
no  effect.    The  above  conditions  are  explained  to  me. 

Repeat  Double  Indent  725. 

India  Rubber  Canvas  Shoes.    Price  List  472.    Maker  511. 

200  cases  each  containing  51  pairs  as  under: — 

Girls'  Size  3     4    5    6    7    8    9     10    11     12     13    1    2 

Pairs        1234555      5      4      4      445 

at  2od.  per  pair  average. 

Free  Bombay  Harbor. 

Quality:  3606. 

Color:  Grey  mottled  as  usual. 

Packing :  Each  pair  in  a  carton  box  with  2  pairs  of  laces  as  usual. 

Stamping:  "Made  in  U.S.A."  to  be  stamped. 

Shipment:  In  4  lots,  1st  Aug.  ipip,  and  the  rest  at  an  interval 

of  4/6  weeks  from  one  another. 
Terms :  D/A,  60  d/s.    No  interest  and  no  Bank  Postage. 

RUSTOMIEE   &   CO. 
(Signature  of  Indent  or.) 


264  INTERNATIONAL  COMMERCE 

c)     Far  Eastern  Indents. 

We  have  already  mentioned  that  the  form  of  Indian  indents 
is  customary  also  in  the  Far  East.  But  in  addition  to  this,  a 
specific  form  has  been  worked  out  for  the  Far  Eastern  trade. 

Here  the  indent  form  bears  the  heading  "Contract."  It  is 
provided  with  the  contract  number.  The  style  of  the  indent  is 
that  of  a  contract  rather  than  that  of  a  letter.  The  two  con- 
tracting parties  are  referred  to  as  "buyer"  or  "purchaser"  and  as 
"seller,"  although  the  commission  relationship  here  is  far  more 
frequent  than  in  India.  The  nature  of  the  business  is  either  in- 
dicated as  a  purchase  contract  ("Contract  between 

byer,  and seller,"  or  "I  herewith  confirm  having 

bought  from  you,"  or  "I  herewith  confirm  having  sold  to  you"), 
or  as  an  order  to  purchase  ("I  have  this  day  ordered  through 
you"). 

The  right  of  the  seller  to  bind  himself  definitely  only  after 
accomplished  purchase  in  Europe  or  America  is  indicated  by  the 
formula  "contract  subject  to  approval."  The  approval  is  stipu- 
lated generally  "within  soonest,"  and  six  to  seven  weeks  is  re- 
garded as  the  usual  time. 

The  seller  is  obliged  to  deliver  within  a  specified  time  or 
"as  soon  as  possible."  Force  majeure  is  stipulated  as  an  excuse 
for  delays  of  for  the  cancellation  of  the  contract  by  the  vendor. 
Delays  in  delivery  make  the  contract  null  and  void  or  cancelled. 
It  is  often  specifically  mentioned  that  partial  deliveries  must  be 
accepted  and  in  that  case  the  balance  of  the  contract  may  be  can- 
celled. 

The  contracts  generally  stipulate  that  the  goods  must  be  ac- 
cepted within  a  certain  time  (2  months  in  China,  1  month  in 
Japan),  within  which  period  they  are  warehoused  at  the  cost  of 
the  buyer. 

In  the  case  of  default  by  the  buyer  the  vendor  has  the  right 
t©  demand  damages  and  interest,  but  this  right  is  seldom  ex- 
ercised. 

Defects  must  be  complained  of  within  a  specified  time. 
Arbitration  clauses  for  the  settlement  of  difficulties  are  frequent 
in  Japanese  indents,  but  generally  absent  from  Chinese  indents. 


FAR  EAST  INDENTS 


265 


< 
X 
O 
2 


X 
en 

O 
U 

X 
H 


en 
2 

O 


Specimen  of  a  Far  East  Indent. 

No.  Shanghai,  9th  May,  1919 

CONTRACT  between  Mr.  LO  HING  KEE  (buyer). 

and  Messrs.  JOHN  SMITH  &  CO.  (sellers). 

Subject  to  approval  by  cable  or  letter  within  soonest. 

5  (five)  cases  at  30  pieces  at  50  yards. 
Crepe  as  per  sample  1016,  30" . 
Design  as  per  sample. 


Colour   assortment  p.    case: 

I' brown    3  pieces  \ 

black    15 

ash   6 

d' green    2 

gentian     2 

red-brown 2 


as  per 
samples. 


jo  pieces 
Price:  Tls.  0.25. — 1%  per  yard. 

To  arrive  as  soon  as  possible. 

To  be  cleared  and  paid  for  within  ttvo  months 
after  arrival. 


Fire  Insurance  covered  by  sellers  only  until  Due-Date  of  contract. 
Interest,  Storage  and  Fire  Insurance  Premium  to  be  paid  by  purchaser 
if  the  goods  have  not  been  completely  taken  delivery  of  within  the  time 
stipulated  above.  Any  claim  of  whatever  nature  to  be  made  within  two 
weeks  after  arrival  of  cargo.  Claims  made  after  that  period  will  not  be 
recognized  nor  can  any  claims  be  recognized  after  the  goods  have  left 
the  wharf  or  our  private  godowns. 

In  the  case  of  purchaser  failing  to  pay  for  the  above  goods  at  the 
end  of  the  time  stipulated  above,  sellers  are  at  liberty,  to  dispose  of  the 
goods  either  privately  or  at  auction  on  purchaser's  account,  who  agrees, 
to  pay  the  deficiency  if  any. 

Force  majeure  to  free  seller  from  all  responsibilities  entered  into 
under  this  contract. 


266  INTERNATIONAL  COMMERCE 

B.     Contracts  in  the  Import  of  Oversea  Produce. 

Oversea  produce  of  various  kinds  may  be  sold  in  Europe 
and  America  while  still  in  transit  upon  the  sea  or  while  being 
loaded  in  the  port  of  shipment.  Two  classes  of  business  are  based 
on  such  sales.  The  first  is  the  ordinary  delivery  contract,  for 
future  delivery,  including  operations  in  futures  on  exchanges 
dealing  with  particular  commodities.  The  intention  is  to  utilize 
the  time  between  the  date  of  future  delivery  and  the  conclusion 
of  the  contract  for  the  transportation  of  the  goods.  Actual  im- 
portation in  such  contracts  is  not  always  the  foremost  considera- 
tion on  the  part  of  the  seller,  particularly  in  the  case  of  exchange 
operations. 

The  other  class  of  business  is  concerned  with  the  actual 
importation.  It  bases  its  peculiarities  on  the  circumstance  that 
the  goods  at  the  time  of  the  conclusion  of  the  contract  are  still 
at  sea  and  not  yet  in  the  sales  territory.  This  is  dealing  with 
produce  on  the  basis  of  "floating  conditions."  Contracts  on  float- 
ing conditions  depend  upon  the  place  of  performance, — where  it 
is  the  oversea  port  of  shipment,  we  have  cif  contracts,  where  it 
is  the  European  or  American  port  of  destination  we  speak  of 
"arrival  contracts."  The  trade  rules  of  the  New  York  Coffee  Ex- 
change formulate  arrival  and  transit  contracts.  The  distinction 
between  cif  and  arrival  contracts  is  not  everywhere  nor  in  con- 
nection with  all  produce  maintained  with  equal  clearness. 

As  vendors  in  these  transactions  we  find  either  an  oversea 
firm,  which  may  have  its  head  or  branch  office  in  Europe  or 
America,  or  an  importer  acting  for  his  own  account  and  less 
frequently  as  a  sales  agent  on  commission.  In  some  instances 
import  business  in  produce  is  passed  from  house  to  house  with 
the  result  that  a  chain  of  buyers  for  the  same  import  contract  is 
formed.  Oversea  firms  having  no  branches  in  Europe  and  Amer- 
ica utilize  the  services  of  agents,  but  these  generally  act  also  for 
Athtr  vendors.  Thus  business  is  done  through  personal  contact 
with  buyers.  But  as  these  transactions  are  likely  to  be  very  im- 
portant in  volume  the  necessity  arises  for  a  written  form  of  con- 
tract, and  in  dealings  in  oversea  produce  on  the  British  markets 
certain  contract  forms  have  been  evolved  which  in  principle  are 
used  throughout  the  world  where  oversea  produce  is  imported. 
Contracts  are  made  out  in  duplicate  or  triplicate  (a  copy 


PRODUCE  CONTRACTS  20? 

for  the  vendor,  one  for  the  buyer,  one  for  the  agent),  or  as  in 
England  in  one  copy  only.  In  the  latter  case  the  buyer  receives 
the  sole  copy  and  he  confirms  it  by  means  of  a  slip  detached  from 
the  contract — known  as  confirmation  note  or  slip,  or  else  he 
writes  a  letter  of  confirmation.  The  vendor,  or  the  broker  (agent) 
makes  out  the  contract.  It  is  signed  by  the  broker,  or  by  one  con- 
tracting party,  or  by  the  vendor,  the  buyer  and  the  broker. 

The  practice  is  to  use  printed  blanks  containing  the  clauses 
under  which  such  business  is  usually  concluded.  Associations 
and  exchanges  specializing  in  the  particular  kind  of  produce  are 
generally  responsible  for  the  wording  of  these  blanks.  Some- 
times vendors  or  brokers  prepare  their  own  blanks.  Occasionally 
a  variety  of  contract  forms  deal  with  the  same  merchandise  in 
accordance  with  its  origin,  or  in  accordance  with  the  volume — 
entire  shiploads  or  part  shiploads,  or  where  either  the  vendor  or 
the  buyer  assumes  the  risk  of  transportation.  Sometimes  the 
same  blank  covers  several  variations,  with  the  undesired  clauses 
crossed  out. 

Generally  the  contract  forms  include  all  of  the  clauses  valid 
for  the  contract,  but  sometimes  reference  is  made  to  standard 
conditions  or  terms  worked  out  by  an  association  or  exchange. 
The  contract  text  is  usually  printed  on  the  two  sides  of  the  blank, 
those  on  the  reverse  being  as  a  rule  clauses  of  general  character, 
and  in  that  case  the  front  of  the  blank  expressly  stipulates  the 
validity  of  conditions  found  on  the  reverse.  Where  the  condi- 
tions have  been  worked  out  by  an  association  or  exchange  this 
body  may  print  the  blanks  and  either  sell  them  or  give  them  free 
to  members.  Such  official  contract  blanks  have  a  heading  such 
as  "Cif  contract",  "Arrival  contract,"  the  year  of  the  compilation, 
or  a  symbol  and  a  number,  such  as  E-2,  which  is  a  contract  form 
current  in  the  international  rice  trade. 

The  tendency  of  these  official  terms  as  compiled  by  associa- 
tions and  exchanges  is  to  protect  the  interests  of  their  members, 
and  occasionally  special  compromise  contracts  are  made  between 
the  two  contracting  parties,  deviating  in  details  from  those  cur- 
rent in  the  trade. 

The  dominating  position  of  England  at  the  time  of  the  de- 
velopment of  organized  trading  in  oversea  produce  has  led  to  the 
general  adoption  of  English  standards,  with  a  few  deviations, 
throughout  the  world.    Oversea  shippers  are  accustomed  to  sell- 


268  INTERNATIONAL  COMMERCE 

ing  in  accordance  with  English  conditions.  In  England  these 
prevail  exclusively.  On  the  continent  of  Europe  they  prevail 
largely.  In  America  the  deviations  are  not  particularly  import- 
ant. For  our  theoretical  consideration  we  will  therefore  take 
the  English  contract  as  a  pattern. 

Cif  contracts  and  arrival  contracts  have  certain  features  in 
common.  We  will  discuss  these  first.  The  element  of  "floating 
conditions"  is  shared  by  both.  The  goods  must  make  an  ocean 
journey  before  they  are  available  at  destination.  Only  rarely 
these  contracts  refer  to  goods  already  arrived  in  the  port  of  des- 
tination and  either  ready  to  be  discharged  or  in  the  course  of 
being  discharged.  The  oversea  vendor  sells  either  goods  that 
are  to  be  loaded  upon  a  vessel  or  are  afloat.  The  time  of  delivery 
is  determined  by  indicating  when  the  goods  will  be  loaded  or 
when  the  ship  is  to  sail,  or  when  the  loading  and  the  sailing  had 
taken  place,  rarely  (exclusively  in  the  case  of  arrival  contracts) 
a  definite  time  of  arrival  or  the  fact  of  the  goods  being  in  course 
of  discharging  is  mentioned.  The  date  of  the  Bill  of  Lading  is 
considered  proof. 

Where  the  name  of  the  vessel  is  not  given,  the  buyer  being 
interested  in  the  safety  of  the  journey,  it  is  customary  to  specify 
the  transport  medium,  "a  steamship",  "a  steel  steamship",  "a  first 
class  steamship."  Or  a  charter  party  of  a  special  class  may  be 
insisted  on,  or  certain  clauses  particularly  mentioned,  such  as 
relating  to  lighterage  or  strikes.  Transshipment  may  be  expressly 
permitted.  The  buyer  may  be  given  the  option  of  certain  ports 
of  entry. 

In  the  case  of  contracts  covering  large  quantities  it  may  be 
specified  that  portions  of  the  contract  may  be  executed  by  ship- 
ment on  several  vessels,  with  a  minimum  for  each  vessel,  each 
shipment  being  regarded  as  a  separate  contract. 

The  goods  may  be  shipped  as  a  shipload  or  a  parcel.  The 
latter  form  of  shipment  may  be  either  expressly  forbidden,  or 
limited  to  shipment  with  other  goods  that  are  not  likely  to  injure 
the  shipment.  Is  merchandise  shipped  in  bulk  to  several  recipi- 
ents, without  being  separated,  or  in  packages  without  marking, 
then  any  defective  portions,  shortage  or  surplusage  must  be  ap- 
portioned pro  rata  among  the  buyers.  The  same  principle  holds 
good  for  sweepings,  where  such  accumulate,  even  where  goods 


PRODUCE  CONTRACTS  269 

are  packed  in  properly  marked  packages  consigned  to  several 
buyers. 

Special  rules  prevail  for  the  declaration  of  the  date  of  ship- 
ment or  loading.  These  rules  cover  the  contents,  the  time  limit 
and  the  transport  medium.  The  object  of  this  declaration  is  to 
prevent  the  vendor  of  piling  up  unduly  on  one  buyer  the  con- 
sequences of  a  mishap  at  sea,  if  he  has  several  shipments  ad- 
dressed to  more  than  one  buyer  underway.  Delay  in  declaration 
is  considered  equivalent  to  delay  in  delivery. 

After  the  goods  have  been  loaded,  shipping  samples  may  be 
sent  to  the  buyers  which  they  may  pass  on  as  resellers.  The 
quantity  as  fixed  in  the  contract  is  generally  approximate.  The 
limit  of  tolerance  is  usually  5%  or  10%.  The  tolerance  is  gen- 
erally interpreted  in  favor  of  the  vendor,  who  may  ship  more 
or  less  in  accordance  with  it.  When  the  quantity  deviation  ex- 
ceeds a  particular  percentage  specified  in  the  contract,  the  buyer 
frequently  is  granted  the  right  of  demanding  an  accounting  for 
the  total  deviation  or  a  re-imbursement.  Sometimes  a  conven- 
tional fine  in  favor  of  the  buyer  is  stipulated  if  the  total  deviation 
exceeds  the  tolerance  limits.  A  surplus  above  the  tolerance  may 
be  declined. 

In  all  such  contracts  the  vendor  overseas  assumes  the  ob- 
ligation to  ship  the  quantity  specified  in  the  contract.  The  proof 
of  it  is  in  the  Bill  of  Lading.  But  where  payment  is  to  be  made 
on  the  basis  of  delivered  quantity,  only  that  is  authoritative. 

A  considerable  latitude  is  left  in  the  contract  with  regard  to 
the  quality.  The  quality  is  determined  in  accordance  with  either 
permanent  standards — either  general  trade  standards  or  special 
standards  of  the  shipper — or  with  standard  samples.  In  many 
lines  of  produce  the  quality  is  determined  by  such  clauses  as 
"fair  average  quality  of  the  season's  shipments  at  time  and  place 
of  shipment."  The  samples  and  standards  are  only  approximately 
authoritative,  the  contracts  reading  "about  as  per  standard"  or 
"about  as  per  sample."  The  buyer  has  seldom  the  right  to  refuse 
the  shipment,  unless  the  percentage  of  inferiority  exceeds  10% 
or  the  shipper  has  been  guilty  of  culpable  negligence.  In  many 
English  contracts  the  clause  is  included  reading  "buyers  on  no 
account  to  reject  the  goods,"  even  where  the  quality  is  guaran- 
teed. The  guarantee  means  that  the  vendor  will  re-imburse  for 
inferiority  in  quality.    The  right  to  re-imbursement  in  many  con- 


270  INTERNATIONAL  COMMERCE 

tracts  begins  where  the  inferiority  exceeds  10%.  Generally  the 
re-imbursement  is  left  to  arbitration  ("if  inferior  a  fair  allow- 
ance to  be  made,  the  same  to  be  settled  by  arbitration").  The 
allowance  may  correspond  in  proportion  to  the  inferiority  or 
exceed  it,  as  stipulated  in  the  contract.  Special  allowance  rates 
may  be  stipulated  in  the  contract  for  various  grades.  Rarely 
any  superiority  in  quality  entitles  the  vendor  to  re-imbursement 
on  the  part  of  the  buyer. 

As  with  regard  to  quantity,  the  vendor  is  obligated  to  ship 
a  certain  quality.  Quality  deterioration  during  the  transport  is 
treated  differently  in  cif  and  in  arrival  contracts,  but  it  must  be 
in  both  instances  determined  what  quality  had  been  shipped. 
Since  the  arbitration  is  effected  in  accordance  with  arbitration 
samples  which  are  drawn  in  the  port  of  entry,  the  arbitrators 
must  consider  the  quality  changes  to  which  the  goods  are  sub- 
ject during  transportation  and  even  the  quality  changes  in  the 
samples  themselves.  In  many  contracts  it  is  stipulated  that  the 
season  of  the  year  when  the  shipment  takes  place  must  be  taken 
into  consideration. 

Sometimes  the  vendor  declines  to  guarantee  goods  as  free 
from  defects  which  make  it  unmerchantable,  if  such  defects  were 
unobservable  by  reasonable  inspection.  Such  a  clause  stamps 
him  to  some  extent  as  a  purchasing  agent  for  the  buyer.  In  fact 
such  a  view  is  supported  in  all  floating  condition  contracts,  since 
the  buyer  is  generally  compelled  to  accept  more  or  less  what  ar- 
rives at  the  port  of  entry.  It  is  here  that  the  arrangement  exists 
that  the  certificate  of  quality  presented  by  the  vendor  is  consi- 
dered final. 

The  acceptance  of  the  goods  must  as  a  rule  take  place  in  the 
port  of  arrival.  Claims  and  demands  for  arbitration  must  be 
made  within  a  certain  time  limit.  This  time  limit  commences  in 
cif  contracts  from  the  completion  of  discharging  operations,  in 
the  case  of  arrival  contracts  from  the  time  the  goods  are  ready 
to  be  received,  and  varies  from  7  to  30  days.  Where  goods  are 
intended  for  re-sale,  these  limits  sometimes  apply  to  the  ultimate 
buyer  and  the  first  buyer  must  pass  the  claims  on  immediately. 

The  examination  as  to  quality  (natural  weight  in  the  case 
of  grain)  or  to  weight  must  be  effected  in  a  strictly  prescribed 
manner  through  prescribed  organs.  The  vendor  or  his  repre- 
sentative have  the  right  to  be  present.    This  is  particularly  true) 


PRODUCE  CONTEACTS  271 

where  samples  are  drawn  for  arbitration  purposes.  Where  the 
contract  obliges  both  parties  to  be  present  at  the  determination 
of  quality  or  weight,  and  either  delays  to  put  in  an  appearance, 
the  other  party  may  demand  the  appointment  of  a  sworn  expert. 

Where  the  vendor  is  in  default,  the  English  contracts  permit 
the  buyer  to  re-purchase  the  goods,  charging  the  vendor  with  his 
damages.  Or  else  he  can  "close  the  contract"  and  demand  the 
re-imbursement  between  the  price  charged  and  an  amount  deter- 
mined by  arbitration,  sometimes  at  a  rate  exceeding  the  market 
rate  prevailing  at  time  of  the  closing  of  the  contract.  Finally 
he  can  claim  damages.  The  difference  between  the  price  charged 
and  that  fixed  by  the  arbitration  is  billed  to  the  vendor  on  the 
basis  of  "invoicing  back."  The  buyer  has  the  same  rights  in  the 
case  of  quality  difference,  though  not  in  the  case  of  quality  de- 
terioration. In  order  to  find  the  vendor  in  default,  the  buyer 
must  within  a  very  brief  period  of  the  contract  performance 
time  demand  the  performance  of  the  contract.  The  buyer  is 
not  obliged  to  grant  any  additional  time,  although  in  jute  con- 
tracts commercial  usage  permits  a  delay  of  one  month,  against 
a  price  reduction  from  week  to  week,  with  a  maximum  of  5%. 
In  the  cif  contracts  dealing  with  American  cotton  in  Liverpool 
the  arbitrators  rule  whether  the  buyer  shall  make  use  of  his 
rights  because  of  delayed  shipments  or  accept  the  delayed  goods 
with  a  re-imbursement. 

In  case  the  buyer  delays  to  accept  the  goods,  the  vendor  has 
the  right  of  re-sale  and  a  claim  for  damages. 

Most  contracts  exclude  responsibility  for  delay  if  due  to 
force  majeure,  such  as  export  restrictions,  blockades,  warlike 
events,  strikes,  rebellions,  etc.  The  usual  effect  of  such  events 
is  the  cancellation  of  the  contract.  Sometimes  however  the 
vendor  receives  a  time  extension  for  delivery.  Thus  in  the  case 
of  navigation  troubles  due  to  ice,  he  may  ship  three  weeks  after 
the  resumption  of  the  navigation.  Likewise  in  the  case  of  strikes, 
etc.,  a  time  extension  may  be  granted  first,  and  the  contract  can- 
celled if  the  shipment  is  not  effected  then.  In  some  cases,  as 
in  the  jute  contracts  in  London,  the  buyer  has  the  option  in  the 
case  of  force  majeure  either  to  insist  on  fulfilment  when  the 
cause  of  delay  is  removed  or  to  withdraw  from  the  contract. 
Sometimes   the   buyer  is  prevented   through    strikes   or   similar 


272  INTERNATIONAL  COMMERCE 

causes  from  taking  over  the  goods.  In  such  cases  the  contract 
is  as  a  rule  extended. 

Where  the  goods  are  lost  either  totally  or  in  part  through 
an  accident  during  the  ocean  journey,  the  vendor  is  neither  ob- 
liged to  supply  another  shipment  nor  to  pay  damages.  This  is 
true  both  of  cif  and  of  arrival  contracts,  though  the  reason  for 
this  differs  in  the  two  classes  of  contracts.  In  the  cif  contracts 
the  performance  is  accomplished  when  the  goods  are  loaded,  in 
the  arrival  contracts  the  vendor  is  bound  only  in, the  case  of  safe 
arrival.  Thus  the  effects  of  the  loss  differ  in  both  cases.  In 
the  arrival  contract  the  regular  effect  of  the  loss  of  shipment  is 
the  cancellation  of  the  contract.  In  the  cif  contract  the  cancella- 
tion is  effected  only  when  payment  has  not  been  made.  Where 
the  contract  is  not  cancelled,  the  buyer  is  covered  by  the  insur- 
ance. 

For  the  cancellation  of  the  contract  the  vendor  must  be  able 
to  prove  that  the  goods  lost  were  intended  by  him  for  the  per- 
formance of  the  contract  which  is  to  be  cancelled.  It  is  easv 
to  do  so,  when  he  had  notified  the  buyer  of  the  shipment  effected 
and  given  him  the  name  of  the  ship.  Many  contracts  stipulate 
the  cancellation  of  the  contract  to  be  depended  upon  such  a  dec- 
laration. In  case  the  goods  are  either  totally  or  partially  salvage 
and  transshipped,  the  contract  is  maintained. 

In  the  case  either  party  becomes  insolvent  contracts  provide 
for  the  immediate  closing  of  the  contract  against  an  accounting 
or  a  transaction  to  cover  elsewhere. 

Disputes  are  to  be  settled  by  arbitrators  who  choose  an 
umpire.  Appeals  from  the  decision  of  the  arbitrators  are  pos- 
sible to  the  committee  of  the  association  under  whose  rules  the 
arbitrators  are  chosen.  The  award  of  arbitrators  or  of  the  com- 
mittee of  appeal  is  stipulated  in  contracts  as  binding.  English 
contracts  stipulate  arbitration  in  England  and  the  jurisdiction  of 
English  courts. 

So  far  for  similarities  between  the  two  forms  of  contracts. 
Their  differences  arise  from  the  difference  in  the  place  of  per- 
formance. The  arrival  contract  refers  to  goods  from  overseas 
that  are  to  be  turned  over  by  the  vendor  after  arrival  in  Europe 
or  America.  The  contract  takes  into  consideration  that  the  vendor 
must  first  procure  his  goods  overseas  and  does  not  demand 
from  him  absolute  conformance  in  quality  and  quantity  with  the 


ARRIVAL  CONTRACTS  273 

contract  in  delivering  his  goods.  It  suffices  if  the  vendor,  in 
accordance  with  the  contract,  is  ready  to  turn  over  to  the  buyer 
in  Europe  and  America  goods  shipped  from  overseas.  For  the 
counter-obligations  of  the  buyer  it  is  the  transfer  at  place  of  ar- 
rival and  not  the  proceedings  at  place  of  shipment  that  is  authori- 
tative. The  fact  that  delivery  takes  place  at  point  of  arrival  in- 
dicates that  this  class  of  business  is  in  the  hands  of  firms  located 
in  European  and  American  ports,  that  is  in  the  hands  of  im- 
porters. The  buyers  have  also  their  place  of  business  here  and 
must  take  over  the  goods  at  the  port  of  arrival,  so  that  arrival 
contracts  are  local  transactions  with  goods  coming  from  over- 
seas. 

The  cif  business,  however,  is  a  long  range  business,  even 
when  both  contracting  parties  happen  to  have  business  establish- 
ments in  the  port  of  arrival.  But  the  authoritative  act  in  the 
contract  performance,  which  also  defines  the  buyer's  obligations, 
is  effected  overseas,  whence  the  goods  the  shipped  for  delivery 
to  the  buyer. 

Thus  the  risk  of  transportation,  in  accordance  with  the 
nature  of  both  contracts,  is  in  the  case  of  the  arrival  contract 
on  the  shoulders  of  the  vendor,  in  the  case  of  the  cif  contracts 
on  the  shoulders  of  the  buyer. 

With  regard  to  quality,  in  the  case  of  arrival  contracts,  the 
vendor  has  merely  the  obligation  to  supply  to  the  buyer  the  goods 
— loaded  in  accordance  with  the  contract — as  they  arrive,  but 
he  must  re-imburse,  not  referring  to  any  original  quality  differ- 
ences, for  any  damage  they  suffer  in  transit,  though  there  are 
exceptions  to  this  rule.  Thus  in  connection  with  the  gambicr 
arrival  contracts  of  the  London  Produce  Brokers'  Association 
the  buyer  must  accept,  without  re-imbursement,  the  damaged 
and  broken  parcel  assigned  to  him. 

Still  on  the  whole  the  buyer  has  the  right  to  reject  damaged 
goods.  Sometimes  a  difference  is  made  between  "sea  damage" 
and  such  damages  as  overheating  of  the  grain  which  are  sum- 
marized in  English  contracts  as  "out  of  condition,"  and  the  buyer 
has  the  right  to  reject  only  sea-damaged  goods.  The  vendor 
does  not  always  find  himself  released  of  all  risks  with  the  arrival 
of  the  goods.  Sometimes  he  agrees  to  deliver  ex  quay  or  ex 
warehouse,  and  he  bears  the  risk  until  then.     Sometimes,  in  ac- 


274  INTERNATIONAL  COMMERCE 

cordance  with  the  clause  of  "landed  terms"  he  must  bear  the 
risk  of  loss  by  fire. 

In  the  cif  business  the  risk  of  deterioration  of  quality  during 
the  sea  journey  is  on  the  shoulders  of  the  buyer.  But  the  vendor 
may  undertake  a  guarantee  for  certain  properties  of  the  goods 
after  arrival.  This  is  particularly  true  of  oil  seeds  and  grain, 
which  are  sold  "sound  delivery,"  or  he  may  guarantee  a  certain 
natural  weight  of  the  grain,  or  a  certain  freedom  from  admix- 
tures in  oil-seeds. 

In  accordance  with  the  nature  of  the  contracts,  it  is  the 
weight  determined  at  the  place  of  arrival  that  must  be  paid  for 
in  arrival  contracts,  and  the  shipped  weight  in  cif  contracts.  But 
there  are  certain  goods  such  as  shellack  where  even  in  arrival 
contracts  ex-ship  terms  prevail,  providing  for  payment  on  the 
basis  of  shipped  weight.  The  vendor  may  sometimes  guarantee 
in  cif  contracts  that  the  delivered  weight  will  not  be  more  than 
a  certain  percentage  below  the  shipped  and  invoiced  weight,  as 
a  basis  for  payment. 

Where  the  arrival  weight  is  guaranteed,  and  the  penetration 
of  water  increases  the  weight  of  the  goods,  it  may  be  stipulated 
that  only  the  weight  corresponding  to  the  normal  sound  condi- 
tion of  the  goods  be  taken  as  the  basis  for  payment.  This  is  the 
case  also  (in  grain  and  oilseeds)  when  the  price  is  quoted  per. . . 
lbs.  sound  delivered.  Commercial  usage  in  the  ports  of  ship- 
ment and  of  arrival  dictates  the  manner  of  ascertaining  the 
weight.  The  costs  of  weighing  are  born  by  the  vendor  in  arrival 
contracts,  by  the  buyer  in  cif  contracts.  Even  when  in  the  case 
of  cif  contracts  the  final  settlement  is  effected  after  the  quantity 
and  the  quality  are  determined  at  the  port  of  arrival,  a  provision- 
al invoice  is  made  up  on  the  basis  of  the  shipped  weight  and 
forms  the  basis  for  drawing  and  for  payment  against  the  ship- 
ping documents  and  for  final  settlement.  In  the  case  of  arrival 
contracts  settlement  is  effected  only  once,  although  even  here 
arbitrations  and  quality  differences  may  make  a  final  settlement 
in  supplement  necessary. 

In  cif  contracts  the  buyer  seeks  to  cover  himself  for  the 
risk  of  transportation  through  marine  insurance,  but  this  is  gen- 
erally effected  by  the  vendor;  contracts  of  this  kir.'d  prescribe 
conditions  for  this  safeguard.  The  amount  of  the  insurance  must 
exceed  the  value  of  the  invoice  2,  5  or  10%.    Sometimes  special 


ARRIVAL  CONTRACTS  275 

forms  of  insurance  policies  are  prescribed,  or  approved  under- 
writers are  insisted  upon.  In  the  case  of  damage  that  party 
must  seek  settlement  with  the  insurer  which  is  affected  by  the 
damage.  So  when  the  seller  must  re-imburse  the  buyer  for  damage, 
it  is  the  seller  who  seeks  re-imbursement  from  the  insurer.  But 
since  in  cif  contracts  the  insurance  policy  forms  an  important 
protection  for  the  buyer,  it  is  often  stipulated  that  he  need  not 
turn  it  over  to  the  vendor  until  the  latter  has  re-imbursed  him 
for  damage. 

Sometimes  the  insurance  is  effected  by  the  buyer,  when  the 
cif  contract  is  transformed  into  a  cf  contract,  or  the  cost  of  the 
insurance  is  deducted  from  the  cif  price.  But  as  a  rule  the 
vendor  prefers  to  arrange  for  the  insurance  because  until  he  has 
received  the  acceptance  of  the  draft  or  payment  he  is  vitally  in- 
terested in  protecting  the  goods.  It  is  sometimes  stipulated  that 
until  the  buyer  has  accepted  the  vendor's  draft  or  paid  him  the 
cost  of  the  goods  he  holds  the  insurance  policy  in  trust  for  the 
vendor. 

In  arrival  contracts  marine  insurance  is  not  mentioned. 

In  cif  contracts  the  authoritative  act  in  the  transfer  of  the 
goods  is  the  shipment  of  the  goods  from  overseas.  The  later 
transfer  of  shipping  documents  is  only  an  obligatory  supplemen- 
tary act.  The  goods  are  considered  delivered  and  the  buyer  must 
take  them  over  from  the  carrier  as  promptly  as  possible  to  avoid 
unnecessary  charges.  In  arrival  contracts  the  shipment  from  over- 
seas is  a  preliminary  condition  for  the  contractual  performance 
which  consists  in  the  delivery  of  the  goods  after  arrival.  The 
arrival  of  the  goods  and  their  readiness  for  the  buyer  are  in- 
dicated in  a  notice  by  the  vendor  to  the  buyer.  The  authori- 
tative act  of  transfer  consists  in  the  actual  surrender  of  the 
goods  (a  supplementary  act  in  the  shape  of  surrender  of  docu- 
ments, warrants,  delivery  orders  may  precede  this,).  The  goods 
may  be  given  up  ex-ship,  ex-quay,  ex-warehouse — landed  terms, 
or  by  being  reloaded  on  another  vessel — "taken  overside  for 
transshipment"  or  loaded  in  cars. 

Quotations  in  cif  contracts  are  naturally  mostly  on  cif 
basis,  sometimes  on  cf  basis,  where  the  buyer  effects  his  own 
insurance,  very  seldom  fob  port  of  shipment.  In  arrival  contracts 
prices  are  ex-ship,  ex-quay,  ex-warehouse,  sous  palan,  generally 
in  accordance  with  the  commercial  usage  in  the  port  of  arrival. 


276  INTEENATIONAL  COMMERCE 

The  usual  terms  of  payment  in  cif  contracts  is  either  accept- 
ance of  draft,  or  cash  payment  with  discount,  by  the  buyer  or 
his  bank  against  surrender  of  shipping  documents.  The  prelimi- 
nary invoice  forms  the  basis  of  payment.  Differences  are  set- 
tled for  later  in  cash. 

European  buyers  of  oversea  products  furnish  acceptance 
through  a  London  bank,  the  drafts  being  drawn  at  60  to  90  days 
sight.  In  England  sales  are  made  against  the  buyers'  acceptance, 
also  on  the  basis  of  documents  against  payment,  the  payment 
being  effected  when  the  ship  arrives,  though  the  draft  be  not 
matured,  and  the  draft  is  discounted  because  of  earlier  pay- 
ment. 

In  arrival  contracts  the  terms  of  payment  rule  which  are 
current  for  local  business  under  prevailing  commercial  usage. 

C.     Contracts  of  the  Exporter  with  the  Manufacturer. 

In  this  connection  we  have  in  mind  the  merchant  specializ- 
ing in  the  export  business  and  selling  goods  of  all  classes  to  over- 
sea markets.  Such  exporters,  from  the  point  of  view  of  the 
general  range  of  products  handled  by  them,  are  also  known  as 
general  exporters.  The  exporter  receives  orders  from  his  over- 
sea customers  or  from  his  own  oversea  branches  and  buys  the 
goods  concerned  from  the  manufacturer.  This  buying  is  mostly 
done  for  own  account,  less  often  on  commission  basis,  and  most- 
ly direct  from  the  manufacturer,  less  often  through  the  medium 
of  an  export  agent.  The  transactions  involve  a  delivery  contract 
in  which  the  exporter  plays  the  part  of  the  buyer.  But  in  view 
of  the  fact  that  he  does  not  buy  the  goods  for  himself,  or  for 
his  own  stock  at  home,  but  for  delivery  abroad,  certain  deviations 
are  to  be  found  in  such  contracts  between  the  exporter  and  the 
producer  from  ordinary  sales  contracts. 

This  form  of  contracts  has  its  beginning  generally  in  an  in- 
quiry sent  by  the  exporter  to  the  producer,  asking  him  to  quote 
for  certain  goods  under  certain  prescribed  conditions  relating  to 
packing,  delivery,  terms  of  payment,  etc.  In  response  to  this 
inquiry  the  manufacturer  may  send  a  pro  forma  invoice  or  a 
letter  complying  with  the  request  in  the  inquiry.  Or  the  busi- 
ness may  be  initiated  by  an  independent  offer  sent  by  the  pro- 
ducer to  the  exporter.    If  the  offer  is  binding,  the  exporter  can 


EXPORTER'S  ORDERS  277 

accept  it  by  means  of  a  brief  letter  of  acceptance.  Or  finally 
the  exporter  may  send  the  manufacturer  a  detailed  order  with 
:  pacifications,  signed  by  the  exporter,  stipulating  certain  condi- 
tions. The  manufacturer  accepts  the  order  in  a  letter  of  con- 
firmation, either  repeating  its  details,  or  referring  to  the  order 
by  number  and  briefly  reiterating  its  details.  By  such  acceptance 
the  manufacturer  indicates  his  acceptance  of  the  various  condi- 
tions and  instructions  contained  in  the  order. 

The  order  may  be  the  result  of  the  acceptance  of  a  binding 
firm  offer,  or  it  may  be  a  business  proposition  of  the  exporter 
which  becomes  valid  only  through  the  acceptance  and  confirma- 
tion by  the  manufacturer. 

The  exporter's  order  is  generally  written  on  a  blank  with 
printed  clauses  which  recite  the  prevailing  conditions  for  the 
particular  class  of  trade  and  for  the  particular  market  for  which 
the  goods  are  destined.  Additional  instructions  may  be  included 
for  the  manufacturer's  guidance,  such  as  instructions,  re-mark- 
ing, special  packing,  the  number  of  invoices  required,  etc. 

Naturally  enough  the  exporter  aims  to  include  among  his 
conditions  such  clauses  as  would  put  the  greater  burden  of  the 
exporting  risk  upon  the  shoulders  of  the  manufacturers.  By  in- 
dicating severe  consequences  for  the  lack  of  care  in  following 
instructions  he  may  seek  to  induce  the  manufacturers  to  execute 
the  order  with  the  maximum  of  accuracy  and  he  may  also  en- 
deavor to  prevent  the  possibility  of  being  eliminated  as  middleman 
in  future  transactions  with  the  final  customer.  In  the  latter  parti- 
cular there  is  growing  up  a  more  amicable  attitude  between  the 
exporter  and  the  manufacturer  to  the  extent  that  both  recognize 
the  proper  functions  of  the  other. 

The  order  bears  a  date  and  a  number,  generally  with  a  serial 
letter.  The  manufacturer's  invoices  must  always  quote  the  order 
number  and  the  mark  prescribed. 

The  time  of  delivery  is  generally  indicated  at  the  port  of 
shipment.  It  must  be  at  that  time  at  the  disposal  of  the  exporter 
ready  for  shipment  to  his  customer.  Frequently  the  name  of 
the  steamer  and  the  day  of  its  departure  is  indicated. 

The  grave  consequences  to  the  exporter  of  delay  in  ship- 
ment to  his  oversea  customer  lead  him  to  emphasize  the  import- 
ance of  delivery  at  the  port  of  shipment  in  good  time. 

Of  importance  are  the  instructions  with  regard  to  the  make- 


278  INTEENATIONAL  COMMERCE 

up  of  the  goods  and  to  packing.  The  exporter  is  in  close  touch 
with  his  market,  and  his  instructions  as  to  packing  are  generally 
based  upon  his  knowledge  of  requirements.  The  manufacturer 
will  not  lightly  contravene  these  instructions,  though  he  may  be 
justified  in  charging  extra  for  unusual  packing,  etc. 

Instructions  as  to  the  marking  of  packages  are  also  specified 
in  the  order. 

In  certain  goods  the  exporter  may  demand  that  the  inside 
packages  be  shipped  in  "neutral"  packing  or  make-up,  but  this 
practice  is  gradually  dying  out  among  American  manufacturers, 
as  though  their  publicity  efforts  the  customers  overseas  learn 
to  demand  special  styles  and  packaging. 

Delivery  is  effected  either  by  sending  the  goods  to  the  ex- 
porter by  rail  or  surrendering  them  to  the  exporter's  freight 
forwarder  at  the  port  of  shipment. 

The  order  must  cite  instructions  for  the  making  out  of  in- 
voices. 

The  specimen  of  an  export  order  form  immediately  follow- 
ing illustrates  instructions  for  a  shipment  intended  for  the  ex- 
porter's Australian  trade. 


EXPORTER'S  ORDERS 


SPECIMEN  OF  AN  EXPORT  FORM  USED  BY  AMERICAN  EXPORTERS 
IN  PLACING  ORDERS  WITH  MANUFACTURERS. 


FRONT. 


EXPORT  ORDER  FORM 
(Name  and  address  of  exporter). 


Mark  Order  No 

(Here    appears    the  Order  Number  and 

prescribed  shipping  Mark  must    appear 
mark.)  on  your  Invoice. 


Mark  packages  as  above  com- 
mencing with  Number up. 


Date 

SHIP  AT  ONCE  TO  (Name  of  Port) 
To  (Name  and  Address  of  Manufacturer) 


THIS  ORDER  IS  PLACED  SUBJECT  TO  INSTRUCTIONS,  TERMS 
AND  CONDITIONS  PRINTED  ON  THE  REVERSE  HEREOF. 

(Here  follows  the  body  of  the  order,  specifying  quanti- 
ties, classes  of  merchandise  and  unit  prices,  as  for 
instance:) 

500  cases  Tin  Plates,  1C  107  lbs.,  14x20", 
112  sheets  to  box,  weight  of  box  107  lbs.  net, 
base  price 


280  INTERNATIONAL  COMMERCE 

(REVERSE.) 
INSTRUCTIONS,  TERMS  AND  CONDITIONS. 


PACKING. 
Goods  to  be  closely  and  securely  packed  for  Export,  in  Least 
Cubic  Space. 

MARKING. 
Mark  as  given  on  the  other  side  of  this  sheet  to  appear  on  all 
outside  packages  and  on  Railroad  Bill  of  Lading.    Do  not  mark  on 
tags  or  cards. 

FREIGHT   CHARGES. 
Must  in  all  cases  be  Prepaid  to  New  York.     Even  though  your 
prices  may  be  f.o.b.  New  York  your  invoice  must  show  the  prices 
at  your  factory  and  cartage  and  the  freight  to  New  York  must  be 
shown  in  addition  to  the  factory  prices. 

BILLS  OF  LADING. 

Signed  Railroad  Bills  of  Lading  showing  our  Shipping  Mark 
must  accompany  your  invoices. 

On  Carload  shipments  Railroad  Bill  of  Lading  to  be  marked 
"For  Export,  Lighterage  Free." 

INVOICING. 

Order  Number,  Date  of  Order,  and  Mark  to  appear  on  Invoices, 
which  must  be  rendered  in  Duplicate.  Memorandum  of  Weight, 
Measurement  and  Contents  of  each  Package  to  accompany  invoice. 
In  order  to  comply  with  Australian  Customs'  Laws,  it  is  necessary 
to  show  the  cost  of  boxing  or  crating.  You  must  make  a  separate 
charge  of  boxing.  This,  and  the  cartage  from  your  factory  to  Rail- 
road Depot  and  the  f reigth  from  Railroad  Depot  to  New  York  must 
be  shown  on  your  invoice  as  an  addition  to  your  f.o.b.  factory  prices. 

All  Cash  Discounts  must  be  deducted  in  the  same  handwriting 
as  the  body  of  the  invoice,  as  we  pay  all  bills  in  the  prescribed  time. 

The  words  Cash  discount  must  not  be  used,  simply  the  per- 
centage stated. 

PRINTED   MATTER. 

Any  printed  or  advertising  material  enclosed  with  goods  must 
be  specified  on  invoice  and  net  weight  of  same  given.  Any  omis- 
sion to  specify  the  correct  contents  of  packages  may  result  in  a 
serious  penalty. 

Suppliers  must  be  prepared  to  pay  the  custom  duty  of  6d.  per 
lb.  in  Australia  and  3d.  per  lb.  in  New  Zealand  and  2d.  per  lb.  in 
South  Africa  on  any  such  advertising  matter,  unless  same  is  asked 
for  on  our  order. 

DESCRIPTION  OF  GOODS. 

Any  widths,  lengths,  or  weights  stamped  on  goods  or  tickets  or 
boxes,  etc.,  or  stated  in  bills  or  invoices  must  be  actual  and  not 
nominal.  Any  description  whatever  of  goods  must  be  correct  and 
accurate  in  every  particular  and  must  in  no  way  be  misleading. 

We  reserve  the  right  to  cancel  this  order  any  time  prior  to 
shipment. 

Manufacturers  guarantee  in  accepting  this  order,  that  the  prices 
they  will  charge  are  their  lowest  cash  Export  Prices  and  that  they 
have  no  arrangements  covering  the  market  to  which  these  goods  are 
to  be  shipped  which  prevent  this.  Goods  shipped  contrary  to  terms 
of  this  order  at  your  risk. 


PART   II. 

PROBLEMS  OF  MODERN  AMERICAN  EXPORT 
PRACTICE. 


CHAPTER  XIV. 

The  Problem  of  Foreign  Credits. 

General  Statement. 

The  expression  chosen  as  the  heading  for  Chapters  XIV — 
XVII  conveys  different  ideas  to  different  minds.  From  the  point 
of  view  of  manufacturers  and  exporters  it  suggests  a  study  of 
those  conditions  and  practices  which  permit  them  to  utilize  to 
the  best  advantage  the  existing  banking  facilities  in  selling  to 
their  customers  abroad  so  that  the  latter  may  have  the  privilege 
of  paying  for  their  purchases  at  a  convenient  time  after  ship- 
ment, while  the  vendor  is  in  a  position,  if  he  so  desires,  to  sec- 
ure cash  at  the  time  of  shipment  through  the  co-operation  of 
banking  institutions. 

This,  indeed,  is  properly  a  subject  for  consideration  under 
the  heading  "The  Problem  of  Foreign  Credits,"  for  even  where 
the  manufacturer  receives  cash  payment  when  the  goods  are  ship- 
ped, and  the  burden  of  financing  is  ostensibly  on  the  bank,  it  is 
the  standing  of  the  manufacturer,  plus  the  security  of  the  goods 
in  some  instances,  that  stamps  the  transaction  with  its  credit  char- 
acteristic from  the  manufacturer's  point  of  view.  The  foreign 
credit  problem  from  this  angle  includes  also  a  study  of  the  need 
of  credit  accommodation  in  the  export  markets,  the  extent  to 
which  it  is  met  by  manufacturers  of  competing  nations,  the  ma- 
chinery of  credit  instruments,  the  existing  banking  facilities  and 
their  possible  improvement  or  expansion. 

But  there  is  also  a  much  broader  field  that  is  covered  by  the 
idea  of  the  foreign  credit  problem.  America  has  almost  over- 
night become  the  great  creditor  nation  of  the  world.  From  all 
sides  come  to  America  insistent  pleas  for  credit  on  a  scale  so 
extensive  that  individual  manufacturers  and  exporters  cannot 
cope  with  them.  The  manufacturer  has  no  capital  to  engage  in 
financing  all  seekers  for  credit  accommodation.     If  his  capital 


284  INTERNATIONAL  COMMERCE 

is  properly  employed  it  is  fully  engaged  in  the  purchase  of  his 
materials,  in  the  operating  of  his  plants,  in  the  payment  of  his 
labor  and  in  the  incidentals  of  such  foreign  merchandizing  as  he 
attends  to  direct.  The  latter  item  includes  all  the  foreign  finan- 
cing which  the  manufacturer  can  properly  undertake.  It  is  here 
that  the  manufacturer  will  need  to  study  the  technique  of  finan- 
cing foreign  shipments,  and  it  is  here  that  the  existing  banking 
facilities  and  their  extension  are  a  subject  of  great  interest  to 
him. 

Better  equipped  to  deal  with  the  financing  of  foreign  ship- 
ments are  those  export  merchants  of  old  standing,  very  largely 
combining  the  functions  of  import  merchants  as  well,  whose  en- 
tire business  is  built  on  that  financing  service  which  their  cus- 
tomers in  oversea  markets  stand  so  urgently  in  need  of;  further 
the  great  exporting  companies  which  have  sprung  into  existence 
in  recent  years  and  whose  organization  is  thoroughly  modern, 
having  been  devised  to  meet  conditions  as  they  exist  to-day,  and 
not  shaped  and  molded  by  the  forces  of  historic  development. 
Such  organizations  are  fully  absorbed  in  the  operations  of  mer- 
chandizing and  of  financing  foreign  shipments,  and  they  do  not 
carry  on  manufacturing  enterprises  primarily,  though  they  may 
do  so  incidentally,  to  meet  the  needs  of  their  merchandizing 
operations.  These  enterprises  are  face  to  face  with  the  broader 
aspects  of  the  foreign  credit  problem,  and  they  must  be  keenly 
alive  to  the  abnormal  conditions  which  have  set  in  following  the 
termination  of  the  world  war  and  as  the  result  of  it. 

But  it  is  the  banking  community  at  large,  as  representing 
the  investing  interests  of  the  nation,  and  as  a  guardian  of  its 
financial  fortunes  that  faces  the  foreign  credit  problem  in  its 
most  significant,  in  its  broadest  aspect.  It  provides  facilities  for 
the  individual  manufacturer  and  the  individual  shipment,  and  here 
the  interest  of  the  individual  manufacturer  ends,  but  it  also  faces 
an  aggregate  problem  and  new  conditions  of  bewildering  uncer- 
tainty ;  it  copes  with  the  great  task  of  adequately  meeting  the 
needs  of  a  newly  born  credit  nation,  with  a  clamor  for  financing 
that  comes  from  new  sources,  presenting  a  perplexing  mixture 
of  conflicting  interests.  The  banking  community  must  create 
precedents :  it  finds  none  to  guide  it.  It  must  devise  means  to 
cope  with  the  situation.     It  must  guide  the  investors  of  the  na- 


FOREIGN  CREDIT  PROBLEM  j»j 

tion  in  new  and  untried  paths,  and  it  must  make  these  paths 
secure.  The  foreign  credit  problem  of  America  is  thus  some- 
thing vastly  more  extensive  and  significant  than  the  problem  of 
the  individual  manufacturers. 

Intended  as  a  study  in  export  practice,  our  consideration 
must  be  directed  primarily  to  the  problems  of  the  manufacturer 
and  the  exporter.  In  his  monograph  on  "Foreign  Credits"  (De- 
partment of  Commerce,  Special  Agents  Series  62)  the  author 
furnished  a  description  of  the  export  credit  methods  of  German 
and  British  manufacturers  and  of  the  machinery  provided  by  the 
German  and  the  British  banks  in  financing  foreign  shipments. 
The  credit  methods  and  problems  of  the  American  manufacturers 
were  also  discussed.  Since  the  writing  of  that  monograph  the 
Federal  Reserve  System  came  into  existence;  a  greater  elasticity 
in  handling  bank  acceptances  has  been  provided;  a  market  for 
acceptances,  far  from  broad  as  yet  though  it  be,  has  been  created ; 
American  banks  have  established  branches  in  foreign  countries; 
the  world  war  has  been  fought  and  won,  terminating  with  at 
least  a  temporary  crippling  of  one  of  the  three  greatest  export- 
ing nations  as  a  competitor  in  the  world's  markets.  America 
has  become  a  creditor  nation. 

We  will  then  rehearse  in  our  present  consideration  the  his- 
toric development  of  the  export  credit  methods  of  Germany, 
England  and  the  United  States;  will  then  pass  to  the  considera- 
tion of  the  improvements  rendered  possible  in  American  export 
credit  methods  through  the  legislation  of  recent  years,  and  will 
endeavor  to  determine  to  what  extent  these  improvements  meet 
the  needs  of  to-day,  and  how  they  might  be  supplemented  by 
further  improvements ;  there  are  also  the  broader  aspects  of  the 
credit  problem  from  the  point  of  view  of  the  entire  nation,  from 
the  point  of  view  of  the  investor,  and  from  the  point  of  view 
of  the  banking  community  as  the  financial  exponent  of  the  na- 
tion and  of  the  investing  public.  But  to  enter  upon  a  discussion 
of  these  broader  aspects  would  take  us  beyond  our  limitations 
as  a  text-book  of  the  theory  and  of  the  practice  of  international 
commerce. 

We  arrive  then  at  the  following  subdivision  of  the  general 
subject: 


286  INTERNATIONAL  COMMERCE 

The  Problem  of  Foreign  Credits. 

A.  The  German  Methods  of  Financing  Foreign  Shipments 
i.     The  historic  development  of  German  export  methods. 

2.  The  technique  of  financing  foreign  shipments  in  Ger- 

many. 

3.  German  banks  and  the  financing  of  foreign  shipments. 

4.  The  advantages  and  the  defects  of  the  German  methods 

of  financing  foreign  shipments. 

B.  The  British  Methods  of  Financing  Foreign  Shipments. 

C.  The  Foreign  Credit  Problem  in  America  Before  the 

Enactment  of  the  Federal  Reserve  Act. 

1.  The  American  exporter  and  the  problem  of  foreign  cred- 

its before  1914. 

2.  Credit  information. 

3.  The  American  banks  and  their  service  to  exporters  be- 

fore the  enactment  of  the  Federal  Reserve  Act. 

D.  Financing  Foreign  Shipments  in  America  Since  the 

Enactment  of  the  Federal  Reserve  Act. 

1.  The  Federal  Reserve  System  as  affecting  the  financing 

of  foreign  shipments. 

2.  American  banks  and  their  service  to  exporters  since  the 

enactment  of  the  Federal  Reserve  Act. 

3.  Present  day  facilities  of  American  banks  in  financing 

foreign  shipments. 


GERMAN  METHODS  887 


A.     German  Methods  of  Financing  Foreign  Shipments, 
i)  The  Historic  Development  of  German  Export  Methods. 

Generally  speaking  it  is  an  admitted  fact  that  during  the 
three  decades  immediately  preceding  the  World  War  the  German 
commercial  organization  met  the  need  for  credit  extension  in 
oversea  commerce  more  efficiently  and  with  greater  satisfaction 
to  seekers  of  credit  than  either  the  British  or  the  American  com- 
mercial organization.  Much  of  German  success  in  oversea  com- 
merce was  directly  due  to  this  readiness  and  ability  to  finance 
foreign  business  to  the  fullest  extent  required  by  circumstances, 
and  to  study  conditions  through  a  well  organized  network  of 
establishments  throughout  the  world. 

It  is  yet  impossible  to  estimate  accurately  the  degree  of 
elimination  of  Germany  as  a  competitive  factor  in  the  world 
trade.  It  is  equally  impossible  to  foretell  to  what  extent — if  any 
— Germany's  economic  ruin  as  the  result  of  the  self-invited  dis- 
aster in  the  field  of  battle  will  affect  her  ability  to  continue  her 
old  time  tactics  in  the  field  of  commerce,  more  particularly  with 
regard  to  the  extension  of  credits  as  a  means  of  securing  trade. 

But  the  need  of  credit  in  international  transactions  will  not 
be  diminished,  on  the  contrary  it  will  be  greatly  increased  in  the 
important  period  of  reconstruction  and  re-adjustment.  The  for- 
eign credit  problem  which  in  the  last  decade  assumed  much  im- 
portance with  the  international  traders  in  America,  has  been 
complicated  not  only  by  the  speculation  as  to  the  means  of  replac- 
ing the  German  element  in  the  economy  of  international  com- 
merce, but  likewise  by  the  addition  of  new  commonwealths  the 
commerce  of  which  will  be  eagerly  sought  after  by  all  exporting 
nations,  and  whose  need  of  credit  is  even  more  pronounced  than 
that  of  the  classical  lands  of  long  credits — Central  and  South 
America. 

Some  of  the  countries  which  hitherto  claimed  credit  to  a  lim- 
ited extent  will  seek  credit  extension  now  for  materials  used  in 
reconstruction. 


288  INTERNATIONAL  COMMERCE 

This  complicates  the  foreign  credit  problem  from  the  point 
of  view  of  the  American  manufacturer  and  exporter.  On  the 
other  hand  several  changes  in  the  machinery  of  financing  have 
taken  place  in  recent  years  in  the  United  States.  The  Federal  Re- 
serve System  has  come  into  existence  and  has  introduced  a  num- 
ber of  important  extensions  in  the  use  of  facilities  for  financing 
foreign  business.  American  banks  have  opened  branches  abroad. 
Important  legistlation  for  export  financing  is  now  pending. 
Largely  due  to  the  abnormal  conditions  during  the  war,  Amer- 
ican manufacturers  who  had  never  before  exported,  have  been 
able  to  export  and  have  learned  to  appreciate  foreign  business. 
They  are  in  it  to  stay.  Materials  which  America  had  never  been 
able  to  ship  on  a  competing  basis  have  been  successfully  mar- 
keted. American  manufacturers  and  exporters  are  looking  for- 
ward to  a  vast  expansion  of  their  foreign  business,  and  desire 
to  give  due  consideration  to  the  foreign  credit  problem  as  an 
essential  factor  in  international  commerce. 

In  order  to  form  an  accurate  opinion  as  to  the  proper  attitude 
which  manufacturers  who  export  and  export  merchants  should 
maintain  to  the  credit  problem  of  to-day,  it  is  of  importance 
to  make  a  thorough  study  of  the  export  methods  which  prevailed 
in  Germany  (which  will  show  us  who  were  the  factors  principal- 
ly concerned  in  the  granting  of  credits,  how  these  credits  were 
granted,  and  what — if  any — features  of  these  methods  are 
worthy  of  adoption)  ;  further  a  study  of  British  export  methods 
(following  the  same  view  points)  ;  then  a  study  of  the  progress 
made  in  America  in  the  machinery  for  financing  foreign  ship- 
ments (which  will  take  up  the  services  now  being  furnished  or 
planned  by  American  banking  institutions)  ;  and  finally  a  study 
of  the  export  credit  problem  from  the  point  of  view  of  the  Amer- 
ican manufacturer  and  exporter.  This  will  enable  us  to  draw 
some  conclusions  as  to  the  proper  policy  to  pursue  in  relation  to 
the  world's  need  of  credit,  always  bearing  in  mind  that  while  it 
is  unwise  to  hope  to  build  up  a  successful  business  adhering 
strictly  to  the  old  dogma  "cash  with  order,"  it  would  be  courting 
disaster  to  launch  upon  a  policy  of  wide-open  credits.  Never 
in  the  history  of  commerce  has  the  need  for  conservation  of 


WOLFE:  "FOREIGN   CREDITS"  289 

credit  resources  been  as  vital  as  it  is  to-day.  Never  has  the  im- 
portance of  the  question — who  is  the  proper  grantor  or  credit? 
a  question  which  is  not  secondary  even  to  the  question — who  is 
the  proper  object  of  credit?  been  of  such  paramount  importance. 
In  the  minds  of  many  manufacturers,  indeed,  the  word  "credit" 
means  nothing  more  than  making  use  of  the  services  of  a  bank 
in  discounting  drafts.  But  the  credit  problem  of  to-day  in  in- 
ternational commerce  means  a  great  deal  more  and  has  many 
angles  which  it  will  be  well  worth  to  study. 

In  1913,  as  the  result  of  much  consular  importunity  (the 
consuls  being  keenly  alive  to  the  needs  of  the  trade  in  the  spheres 
of  their  activity)  and  of  much  outside  advice  in  the  press,  the 
American  manufacturers  were  greatly  stirred  up  about  the  ac- 
cusation that  they  did  not  maintain  toward  their  oversea  cus- 
tomers the  same  liberal  attitude  in  the  matter  of  credits  as  did 
their  German  competitors.  The  Department  of  Commerce  com- 
missioned the  author  to  investigate  the  situation,  and  the  results 
of  the  investigation  were  collated  in  his  monograph  on  "Foreign 
Credits."  A  number  of  suggestions  were  made  for  the  improve- 
ment in  financing  foreign  shipments  and  for  the  extension 
of  banking  facilities.  Some  of  the  suggestions  referring  to  banks 
were  later  adopted  by  law,  and  the  service  of  American  banks 
to  American  manufacturers  in  1919  is  vastly  superior  to  that 
which  they  were  able  to  extend  under  the  inadequate  legislation 
in  former  years.  But  the  principal  result  of  the  investigation 
was  to  demonstrate  clearly  that  as  manufacturers,  the  Germans 
were  no  more  liberal  in  granting  credits  overseas  than  their 
American  competitors,  and  that  Germany  possessed  an  apparatus 
for  financing  foreign  shipments,  which  had  been  built  up  in  ac- 
cordance with  the  historic  development  of  the  German  pene- 
tration in  the  export  fields.  To  duplicate  this  was  neither  pos- 
sible nor  advisable  in  American  export  trade. 

Always  bearing  in  mind  the  exposition  in  the  earlier  chapters 
of  this  work  of  the  organization  of  trade  in  the  importing  coun- 
tries, and  the  methods  of  distribution  practised  by  the  various 
classes  of  importers,  we  may  benefit  by  a  rehearsal  of  the  sub- 
ject-matter in  the  author's  monograph  on  "Foreign  Credits"  as 


290  INTERNATIONAL  COMMERCE 

it  deals  with  German  and  British  export  methods,  passing  to  a 
consideration  of  the  present  day  foreign  credit  problem  as  it 
confronts  the  American  exporting  manufacturer  and  export  mer- 
chant, and  reviewing  the  present  day  machinery  of  American 
banks. 

The  German  export  trade  to  oversea  countries  was  insig- 
nificant until  about  the  middle  of  the  eighteenth  century,  princi- 
pally for  the  reason  that  the  countries  with  colonial  possessions 
maintained  stringent  laws  prohibiting  foreigners  to  trade  with  the 
colonies  and  excluding  foreign  firms  from  their  ports.  The  colo- 
nies were  forced  to  sell  their  produce  to  the  motherland. 

Owing  to  their  favorable  position,  the  Hansa  cities  of  Ger- 
many, chief  of  them  Hamburg,  nevertheless  did  a  flourishing 
business  in  distributing  colonial  products  as  middlemen,  gather- 
ing them  from  English,  Dutch,  French,  and  Spanish  ports. 

At  the  end  of  the  eighteenth  century  there  commenced  a 
gradual  weakening  of  the  exclusive  colonial  policy.  The  mer- 
chants of  Hamburg  began  to  do  a  large  business  with  the  Amer- 
ican possessions  of  Spain  under  the  cover  of  some  relative  na- 
turalized in  Spain  or  a  Spanish  employee.  In  1797  the  German 
traders  profited  by  the  concessions  which  the  East  India  Co.  had 
granted  to  Americans  and  started  direct  business  relations  with 
India. 

The  Declaration  of  Independence  of  the  United  States  was 
a  tremendous  impetus  to  the  merchants  of  Hamburg,  Bremen, 
and  Lubeck;  for  the  first  time  German  traders  had  an  oppor- 
tunity to  establish  branches  of  their  business  in  an  oversea  coun- 
try. And  it  is  very  clear  that  this  policy  of  gaining  foothold  in 
oversea  lands  by  establishing  branch  houses  has  been  one  of  the 
most  secure  foundations  of  German  success  in  the  export  trade. 

The  beginning  of  the  nineteenth  century  was  a  period  of 
retrogression,  due  to  Napoleonic  wars.  Then  came  the  independ- 
ence of  various  Latin-American  countries,  which  opened  a  new 
field  for  direct  trading.  At  the  end  of  the  first  quarter  of  the 
nineteenth  century  Hamburg  was  in  direct  and  regular  maritime 
relations  with  the  east  coast  of  South  America,  West  Indies, 
Mexico,  Central  America,  and  the  west  and  north  coasts  of 
South  America.     In  1843  the  British-Chinese  treaty  opened  the 


GERMAN  EXPORT  HISTORY  291 

Chinese  treaty  ports  to  the  German  trade  by  placing  all  foreign 
traders  on  a  footing  of  equality.  The  Germans  immediately 
established  business  houses  in  Canton,  Hongkong,  and  elsewhere. 
Since  1813  foreigners  have  been  free  to  trade  with  British  India. 
In  1848  the  Indian  Government  dropped  discriminations  against 
foreign  flags  in  Indian  ports  and  in  1859  against  foreign  goods 
in  general.  In  Japan  for  a  long  time  the  distrust  of  foreigners 
prevented  Germans  from  cultivating  direct  relations.  In  1874 
we  find  the  first  direct  import  from  Japan  into  Germany.  It  was 
only  after  the  formation  of  the  German  Empire  that  the  Ger- 
man foreign  trade  with  Asia  began  to  grow  at  a  remarkable  rate 
of  speed,  but  until  then  the  political  impotence  of  Hanseatic  cities 
was  a  great  obstacle  to  the  development  of  their  trade. 

In  Africa  the  first  relations  of  the  German  exporters  were 
with  the  islands  off  the  African  coast  in  the  Atlantic  Ocean;  in 
the  fourth  decade  of  the  nineteenth  century  the  Germans  founded 
settlements  in  Lagos  and  Liberia.  Year  after  year  the  German 
traders  extended  their  sphere  of  activity  in  Africa  by  a  system 
of  "peaceful  penetration."  We  find  them  starting  settlements 
on  the  East  Coast  of  Zanzibar,  and  toward  the  end  of  the  nine- 
teenth century  they  had  houses  in  Morocco. 

In  the  earlier  phase  of  the  German  export  trade  the  German 
merchants  made  use  of  the  British  commercial  sales  organization 
which  in  the  meanwhile  had  been  built  up  in  many  oversea  ter- 
ritories. The  British  merchants  had  been  the  first  to  organize 
their  oversea  trade  on  a  systematic  basis.  Most  importers  and 
exporters  in  the  export  field  in  the  early  days  were  branches  of 
British  houses,  but  many  of  these  British  houses  had  been 
founded  by  citizens  of  Hanseatic  cities  who  had  emigrated  to 
England,  because  trading  under  the  British  flag  afforded  them 
protection  and  a  wider  field  of  activity.  The  merchants  in  Ham- 
burg began  to  do  their  export  business  through  these  British 
houses  by  sending  consignments  to  their  oversea  branches.  They 
had  the  assurance  of  honest  dealings,  and  they  could  rely  on  a 
knowledge  of  local  conditions  on  the  part  of  the  consignee. 

It  was  particularly  in  American  countries,  in  Asia,  Australia, 
and  South  Africa,  that  the  German  export  trade  was  built  up 
on  the  co-operation  of  established  merchants  of  other  national- 
ities.   In  some  few  countries,  especially  along  the  coasts  of  East 


292  INTERNATIONAL  COMMERCE 

and  West  Africa,  the  Hamburg  merchants  were  pioneers  and 
built  up  the  first  forms  of  commercial  intercourse.  Here  a  ship, 
laden  with  all  sorts  of  the  very  cheapest  merchandise,  would 
be  sent  haphazard  along  the  coast.  A  barter  business  with  the 
natives  would  be  attempted  at  first.  Years  might  pass  before 
another  ship  would  touch  at  the  same  point. 

Later  the  vessels  would  anchor  at  the  mouths  of  rivers  or 
anywhere  along  the  coast  where  the  surf  would  permit,  and  serve 
as  warehouses  for  the  reception  of  native  produce.  From  these 
iioating  warehouses  there  was  an  easy  transition  to  small  per- 
manent structures  on  shore.  It  was  easy  now  to  send  ships  at 
regular  intervals  for  the  replenishment  of  supplies.  But  the 
peddling  of  German  goods  here  and  the  consignment  of  German 
goods  there  wrere  only  the  prelude  to  a  more  rational  and  system- 
atic method  of  reaching  oversea  markets. 

The  establishment  of  purely  German  business  houses  in  ex- 
port markets  was  the  next  logical  step  after  the  various  dis- 
abilities of  foreign  traders  in  the  different  countries  had  gradu- 
ally disappeared. 

The  first  business  ventures  oversea  were  attempted  by  the 
Hanseatic  houses  in  the  United  States  of  America  and  were  the 
immediate  cause  of  brisk  business  relations  between  the  Ger- 
mans and  the  United  States.  In  1845  there  were  343  German 
business  houses,  not  counting  retail  stores,  in  non-European 
countries:  134  in  the  United  States,  48  in  Mexico,  3  in  Texas, 
1  in  Central  America,  34  in  the  West  Indies,  98  in  South  Amer- 
ica, 14  in  India  and  China,  11  in  Africa. 

The  customers  of  these  oversea  branches  were  partly  deal- 
ers, partly  consumers.  The  purchases  were  made  from  stock 
after  examination;  payment  was  made  in  money.  On  the  west 
and  the  east  coasts  of  Africa  there  was  a  system  of  barter  be- 
tween the  German  trader  and  the  consumer.  Here  the  business 
resolved  itself  into  a  delivery  of  European  goods  and  the  ac- 
ceptance of  native  products,  and  until  the  latter  were  disposed 
of  the  trader  was  not  sure  of  his  profits.  He  was  forced,  there- 
fore, to  put  a  very  high  value  on  his  goods,  a  very  low  value 
on  the  native  produce,  and  to  exact  very  high  prices  for  the  lat- 
ter on  its  arrival  in  Europe. 


EARLY  GERMAN  EFFORTS  293 

German  trade  with  Australasia  was  for  a  long  time  insig- 
nificant, until  the  settlement  of  the  Germans  in  Samoa  and  the 
other  South  Sea  Islands  gradually  opened  up  an  increasing  busi- 
ness. 

Leaving  this  brief  geographical  outline  of  the  expansion  of 
the  German  export  trade,  we  may  take  up  a  cursory  review  of 
the  development  of  the  German  export  methods,  from  the  first 
tentative  stretching  out  for  foreign  markets  up  to  the  recent 
stage,  with  its  vast  network  of  foreign  branches,  agencies,  and 
banks,  with  its  remarkable  organization,  co-operation,  and  spe- 
cialization at  home  and  abroad — in  brief,  with  its  combination 
of  all  those  elements  which  had  contributed  to  the  building  up 
of  German  success  and  prestige  in  the  export  trade  before  the 
World  War. 

In  the  early  history  of  the  German  export  trade  the  mer- 
chant princes  of  the  Hansa  cities  sent  out  expeditions  in  charge 
of  super-cargoes  to  try  their  luck  in  oversea  markets.  These  were 
hazardous  ventures,  while  the  safer  and  more  legitimate  business 
was  carried  on  by  these  merchants  with  European  countries. 
These  expeditions  ran  the  risk  of  annihilation  by  the  powers  of 
nature  and  man.  The  foreign  men-of-war  and  the  ruthless  pirates 
which  infested  many  seas  were  more  to  be  dreaded  than  storms 
and  shoals.  When  the  ban  against  foreign  trading  was  lifted, 
there  was  an  immediate  increase  in  these  haphazard  ventures,  with 
the  result  that  sometimes  there  was  a  superfluity  of  imports  in 
markets  incapable  of  assimilating  them,  and  besides  instances 
of  fraud  on  the  part  of  super-cargoes  began  to  multiply  at  an 
alarming  rate.  This  system  could  exist  only  as  long  as  competi- 
tion was  dormant.  With  the  growth  of  competition  a  less  waste- 
ful system  was  bound  to  develop. 

The  first  exports  from  the  Hanseatic  cities  to  the  United 
States  and  other  oversea  lands  were  German  hand-made  linen 
goods.  In  the  early  part  of  the  nineteenth  century  the  cheap  linen 
and  cotton  products  of  the  British  and  Belgian  spinning  mills 
crowded  out  the  German  linens  from  many  quarters.  But  still 
the  Germans  sold  large  quantities  of  linen  in  Mexico,  Cuba, 
Venezuela,  Brazil,  Porto  Rico,  etc.  In  addition,  they  exported 
glass  and  hardware  and  various  textiles. 

In  the  first  half  of  the  nineteenth  century  the  oversea  lands 


294  INTERNATIONAL  COMMERCE 

were  as  yet  undeveloped  economically;  many  of  them  now  ex- 
port foodstuffs  to  Europe,  but  in  those  days  the  Hamburg  mer- 
chants sold  them  salt  meats,  butter  and  cheese,  beers  and  liquors. 
Lack  of  local  transport  facilities  enabled  the  German  merchants 
to  trade  in  colonial  goods  even  between  the  various  oversea  mar- 
kets. 

Thus,  at  a  time  when  the  German  industries  were  at  a  low 
ebb  the  Hanseatic  exporters  still  maintained  their  position  abroad. 
The  British  industries  furnished  many  products  which  the  Ham- 
burg merchants  carried  to  Central  and  South  America.  The 
extra  cost  of  shipment  from  England  to  Hamburg  was  slight. 
In  1848  England  imposed  discriminating  duties  against  Brazilian 
and  Cuban  coffee  and  sugar,  because  of  the  employment  of 
slaves,  and  the  direct  trade  relations  of  Hamburg  with  Brazil  and 
Cuba  were  greatly  extended.  During  this  period  of  export  ac- 
tivity the  merchant  engaged  in  the  oversea  trade  required  a  con- 
siderable capital  for  his  operations.  The  export  markets  were 
hard  to  reach.  To  supply  them  with  goods  it  was  necessary  to 
maintain  branch  establishments  and  depots  abroad. 

The  improved  means  of  communication,  consisting  first  of 
regular  sailing  ships  and  later  of  steam-packet  lines,  between  the 
exporting  ports  and  the  principal  oversea  ports  revolutionized 
the  export  trade.  The  merchant  was  no  longer  forced  to  own 
or  charter  ships.  The  time  required  for  getting  the  goods  into 
the  hands  of  foreign  customers  was  minimized.  Mail  could  be 
dispatched  and  looked  for  on  regular  dates.  The  opening  of 
the  Suez  Canal  brought  the  East  almost  to  the  door  of  Europe. 
Telegraph  and  cable  connections  completed  the  task  of  bringing 
the  exporting  nations  and  their  foreign  markets  closer  together. 

This  revolution,  still  recent  even  for  our  fast-living  age, 
changed  the  following  conditions  in  the  export  field:  formerly 
the  buyers  of  imported  goods  were  dependent  upon  the  available 
supply  of  these  goods  in  the  warehouses  and  stocks  of  the  im- 
porters. It  was  difficult  to  replenish  the  stock.  Shipments  were 
made  at  rare  intervals ;  the  goods  were  chosen  and  dispatched 
by  the  shippers  to  correspond  with  the  exporter's  ideas  as  to  the 
likely  demand  and  the  quality  desired.  Between  shipments  it  was 
difficult  to  fill  any  emergency  requirements.  The  importer  could 
not  accept  his  customer's  order  for  goods  he  had  not  in  stock, 


EXPORT  MERCHANTS  295 

for  the  reason  that  he  could  not  assure  the  latter  that  the  goods 
would  be  at  hand  in  reasonable  time. 

The  acceptance  of  orders  and  the  facilities  for  filling  them, 
of  course,  meant  a  tremendous  economy.  A  wholesale  establish- 
ment with  varied  stock  could  now  be  frequently  replaced  by  a 
single  representative  with  sample  rooms  and  a  staff  of  traveling 
salesmen  calling  on  the  customers  in  the  minor  points.  How- 
ever, in  most  instances  the  old  branches  were  still  maintained; 
the  change  was  more  noticeable  in  the  creation  of  a  large  num- 
ber of  German  export  firms  specializing  in  the  filling  of  orders, 
requiring  less  capital  than  the  old  style  houses,  doing  business 
on  a  commission  basis  and  bearing  no  risk  with  regard  to  the 
disposal  of  the  goods.  The  amount  of  capital  invested  by  this 
new  type  of  export  houses  depended  upon  arrangements  with  the 
manufacturer  as  to  the  payment  for  the  goods  supplied  and  with 
the  oversea  customer  in  whose  behalf  the  goods  were  bought. 

The  old  style  export  merchant  had  four  distinct  functions : 
He  exported  merchandise  from  Europe ;  he  imported  foreign 
produce  into  Europe;  through  his  foreign  branch  he  imported 
merchandise  into  foreign  countries ;  he  also  exported  produce 
through  this  same  branch  from  foreign  countries.  The  new  type 
cf  export  firms  devoted  themselves  to  export  exclusively ;  instead 
of  dealing  with  branches  of  their  own  abroad  they  had  to  deal 
with  independent  factors,  the  foreign  importers. 

While  as  a  matter  of  national  economics  the  exports  of  cot- 
ton goods,  for  instance,  may  be  still  considered  as  being  balanced 
by  shipments  of  coffee  or  some  other  produce  from  across  the 
sea,  in  private  trading  this  is  no  longer  the  case.  Nevertheless, 
it  is  obvious  that  the  cotton-goods  shipments  are  paid  for  by 
credits  arising  in  this  instance  from  the  export  of  coffee.  There 
were  before  the  world  war  in  Germany  export  houses  with 
branches  of  their  own  in  Latin-American  countries,  in  the  Far 
East,  in  West  and  East  Africa,  and  there  were  also  many  export 
merchants  without  such  branches  as  well  as  independent  exclu- 
sive import  merchants.  In  1905  there  were  2,186  listed  export 
and  import  houses  in  Germany,  of  which  1,051  were  doing  ex- 
clusively an  export  business,  118  exclusively  an  import  business, 
and  752  both  an  export  and  import  business.  Positive  data  re- 
garding the  remainder  are  lacking.    Out  of  923  Hamburg  mer- 


296  INTEENATIONAL  COMMERCE 

chants  in  the  foreign  trade  listed  in  the  same  year  the  figures 
were  252,  35,  and  636,  respectively. 

The  German  export  merchants,  principally  those  in  Ham- 
burg, having  branches  of  their  own  in  tropical  countries,  were 
importers  of  palm  kernels,  palm  oil,  African  rubber,  and  copra. 
Export  merchants  having  no  branches  of  their  own  abroad  were 
at  the  same  time  large  importers  of  coffee,  cocoa,  skins,  rubber 
from  Latin-America,  and  spices  from  the  Dutch  East  Indies. 

Up  to  this  stage  in  the  history  of  the  German  export  trade 
the  export  merchant  had  been  the  undisputed  distributer  of 
manufactures  in  the  foreign  markets.  This  condition  is  typical, 
as  a  matter  of  fact,  of  all  exporting  nations.  Only  later  the 
German  manufacturer  conceived  the  ambitious  idea  of  eliminat- 
ing him  as  a  factor.  The  manufacturers,  and  the  champions  of 
"direct"  trading,  considered  the  export  merchant  as  a  parasite 
fattening  on  the  ignorance  of  the  manufacturer  regarding  foreign 
conditions.  The  export  interests,  on  the  other  hand,  claimed  that 
the  export  merchant  was  an  absolutely  essential  link  in  commer- 
cial relations  between  manufacturers  and  the  foreign  buyers. 

Where  the  foreigner  barters  his  produce  for  foreign  mer- 
chandise the  position  of  the  export  merchant  is  unassailable. 
Where  the  foreign  buyer  has  advanced  economically  so  far  as 
to  be  able  to  contract  for  his  requirements  independently,  what 
need  is  there  of  an  export  merchant?  The  German  exporter 
could  point  out  the  following  avenues  of  usefulness :  The  buyer 
in  the  export  market  may  require  varying  quantities  of  merchan- 
dise from  a  considerable  number  of  sources.  In  many  instances  he 
could  not  begin  to  import  direct  certain  classes  of  German  goods, 
such,  for  instance,  as  are  manufactured  by  a  number  of  small 
producers,  goods  of  Solingen  and  Remscheid  manufacture,  cer- 
tain German  leather  goods,  toys,  notions,  textiles.  These  manu- 
facturers are  individually  too  small  to  export  direct.  The  prin- 
cipal merit  of  the  exporter,  however,  is  that  he  relieves  the 
manufacturer  of  the  risk  of  granting  credit  to  foreign  customers. 
We  discuss  this  subject  at  length  in  the  earlier  chapters  of  this 
work. 

Let  us  revert  for  a  moment  to  the  general  status  of  the 
German  export  merchant  in  1914  before  taking  up  his  place  in 
the  financing  of  German  export  shipments.     The  principal  ex- 


HAMBURG  EXPORT  AGENTS  297 

port  merchants  of  Germany  were  located  in  Hamburg.  These 
attended  to  what  is  known  in  Germany  as  the  "oversea"  trade, 
in  distinction  from  export  trade  by  rail  to  other  European  coun- 
tries. Sweden  and  Norway,  even,  were  not  regarded  as  "oversea" 
markets.  The  exporters  cultivating  the  trade  of  the  European 
countries  were,  in  addition,  frequently  located  near  the  centers 
of  production  of  the  various  classes  of  manufactured  goods  and 
not  necessarily  in  Hamburg  or  Bremen. 

Next  to  the  export  merchants  there  were  found  in  Hamburg 
the  so-called  export  agents,  whose  business  was  to  keep  the  ex- 
port merchants  posted  with  regard  to  the  products  of  their  prin- 
cipals. These  export  agents  maintained  large  sample  rooms  and 
frequently  represented  a  great  number  of  manufacturers  in  the 
most  varied  trades.  The  export  merchant  could  not  possibly 
know  everything  about  the  different  goods  ordered  through  him 
by  the  foreign  buyer.  The  export  agent  knew  his  particular 
lines  and  was  relied  upon  by  the  export  merchant  to  enlighten 
him.  Every  export  merchant  in  Hamburg  had  classified  lists 
of  these  agents.  Both  the  export  merchants  and  the  export 
agents  had  their  own  associations,  and  their  relations  were  regu- 
lated by  a  well-recognized  code  of  usage.  The  export  agent  gen- 
erally received  only  i  per  cent  on  the  gross  turnover,  and  this 
system  provided  for  Germany  a  satisfactory  and  economical 
medium  between  the  export  merchant  and  manufacturer. 

The  German  manufacturer  doing  an  export  business  either 
entrusted  the  export  merchant  with  the  task  of  pushing  his  goods 
in  the  export  field,  which  was  done  by  means  of  sending  out 
catalogues,  samples,  price  lists,  etc.  (mostly  "neutral,"  that  is, 
without  revealing  the  name  of  the  manufacturer),  or  he  merely 
contented  himself  with  accepting  the  orders  turned  over  to  him 
by  export  merchants,  relying  on  his  established  connections  with 
these  merchants  or  on  the  canvassing  efforts  of  the  export  agent, 
or  both.  The  small  manufacturer  in  Germany  seldom  dreamt  of 
installing  his  own  sales  organization  for  foreign  markets.  Only 
the  big  manufacturer  with  an  outlet  for  his  goods  in  some  spe- 
cial geographically  well-defined  market  could  undertake  to  do 
so.  The  so-called  "kartells,"  combinations  of  producers  of  raw 
and  semi-manufactured  products,  were  also  in  a  position  to 
establish  selling  branches  of  their  own  abroad,  to  maintain  travel- 


298  INTERNATIONAL  COMMERCE 

ing  salesmen,  and  to  push  their  goods  through  agents  of  their 
own. 

The  German  manufacturer,  striving  as  he  was  for  "direct" 
trading,  was  not  equipped  for  it.  There  was  an  unmistakable 
tendency  to  eliminate  the  export  merchants,  but  the  realization 
of  the  difficulties  in  the  way  curbed  it  considerably.  The  manu- 
facturer who  had  tried  "direct"  trading  and  had  "burned  his 
fingers"  found  little  sympathy  from  the  export  merchant.  His 
example  was  held  up  as  a  terrible  warning,  and  the  export  mer- 
chant asked  with  a  considerable  amount  of  logic :  "Does  it  pay 
to  deal  direct  and  run  the  risks  of  loss,  if  by  taking  advantage 
of  a  strong  existing  sales  organization  with  a  knowledge  of  local 
conditions  such  as  the  manufacturer  could  never  hope  to  rival, 
the  risk  may  be  entirely  eliminated?" 

But  the  German  manufacturer  sought  to  increase  his  for- 
eign sales  and  he  could  not  content  himself  by  receiving  chance 
orders.  He  had  the  opportunity  of  making  sole  selling  arrange- 
ments with  export  merchants  for  certain  special  markets.  In 
this  case  the  export  merchant  was  bound  to  sell  no  article  com- 
peting with  his  principal's  goods.  The  manufacturer  paid  the 
export  merchant  a  commission  agreed  upon  whether  orders  were 
received  direct  or  through  the  export  merchant,  provided  they 
came  from  the  territory  assigned  to  the  latter.  The  costs  of 
traveling  salesmen  were  thus  distributed  among  a  certain  num- 
ber of  non-competing  manufacturers.  The  traveling  salesmen 
sought  to  push  the  lines  they  represented  to  the  best  of  their 
ability.  The  export  merchant  relieved  the  manufacturer  of  all 
the  routine  of  shipping  and  was  in  fact  the  manufacturer's  "ex- 
port department." 

It  has  been  mentioned  that  one  of  the  principal  functions 
of  the  export  merchant  is  to  relieve  the  manufacturer  of  the 
risk  of  foreign  credit.  This  risk,  of  course,  is  considerable. 
The  German  manufacturer  was  still  less  able  than  his  American 
or  British  competitors  to  finance  the  purchasing  operations  of  a 
large  number  of  foreign  buyers,  to  wait  months  for  the  receipt 
of  funds,  to  run  the  risk  of  the  foreign  customer  refusing  to 
receive  the  goods  or  to  pay  for  them.  In  order  to  be  able  to 
keep  on  manufacturing,  the  German  manufacturer  wanted  the 
capital  invested  in  the  manufacture  of  his  goods  returned  to  him 


LONG-TERM  CREDITS  299 

with  considerable  promptness  in  the  shape  of  money.  This  is 
true  of  manufacturers  in  all  countries,  but  particularly  so  of  ( rer- 
man  manufacturers,  since  the  employment  of  industrial  credit  in 
Germany  was  exceedingly  widespread  and  manufacturers  worked 
to  a  large  extent  with  "other  people's  money." 

The  foreign  customer  is  unable  to  pay  cash  for  his  goods. 
If  the  foreign  customer  does  not  command  adequate  means  at 
home,  or  has  at  his  disposal  a  reasonably  cheap  credit,  he  must 
postpone  the  payment  for  his  purchases  until  he  has  disposed  of 
his  imports  or  received  the  value  of  his  exports. 

The  German  export  merchant  through  his  branches  within  the 
sphere  of  his  activity  was  in  touch  with  the  customer.  He  had 
the  means  to  finance  the  foreigner's  imports,  either  through  his 
own  capital  or  with  the  assistance  of  the  banks. 

We  shall  have  the  opportunity  of  examining  minutely  the 
question  of  these  credit  dealings,  but  we  may  here  state  that  the 
long-term  credits  granted  by  the  Germans  in  Latin- America  and 
the  Far  East,  and  in  fact  in  almost  all  export  markets,  were  not 
credits  granted  by  manufacturers,  but  by  the  export  merchants 
with  or  without  the  financial  assistance  of  certain  banks.  Except- 
ing in  the  European  countries,  German  manufacturers  seldom, 
if  ever,  granted  direct  credit  to  foreign  customers. 

The  export  merchant  paid  the  manufacturer  in  cash.  This 
meant  in  Germany  cash  within  30  days.  All  Hamburg  export 
merchants  settled  with  manufacturers  within  30  days.  This  was 
considered  "cash,"  because  the  time  was  taken  not  for  the  sake 
of  credit  but  for  the  sake  of  convenience.  The  export  merchant 
wanted  to  have  the  goods  in  his  possession  before  he  paid.  Nor 
did  he  utilize  the  entire  30  days,  but  made  a  practice  of  paying 
on  the  10th,  15th,  last,  or  any  other  special  day  of  the  month 
following  the  purchase,  because  it  was  more  convenient  to  pay 
all  such  invoices  at  one  time. 

Of  course,  there  were  exceptions  to  this  rule.  In  the  ma- 
chinery trade,  particularly  where  machines  were  built  to  order, 
one-third  of  the  purchase  price  was  paid  by  the  exporter  to  the 
manufacturer  with  order,  the  balance  when  the  machine  was  re- 
ceived by  the  exporter  or  his  agent.  Certain  goods  were  "cash" 
lines,  demanding  payment  on  the  week  day  following  the  trans- 
action.   These  were  principally  mining  and  agricultural  products. 


300  INTERNATIONAL  COMMERCE 

German  ore,  foreign  goods  such  as  nitrates,  coffee,  tea,  cotton, 
and  oils,  which  the  exporter  bought  for  resale  to  other  export 
markets,  were  settled  for  in  "cash,"  while  the  foreign  buyers 
were  granted  time  within  which  they  might  settle. 

With  regard  to  standard  terms  of  payment  for  this  or  that 
class  of  products,  the  German  manufacturers  had  been  unable 
to  do  much  that  is  definite.  Flirting  with  "direct"  trade  as  some 
of  them  were,  they  turned  to  the  German  export  merchant  for 
prompt  and  precise  settlement.  On  the  other  hand,  the  German 
"kartells,"  being,  as  has  been  mentioned,  combinations  of  pro- 
ducers of  raw  and  semi-manufactured  products,  did  a  great  deal 
to  standardize  their  credit  terms  from  time  to  time,  dependent 
upon  production,  demand,  and  various  local  conditions. 

We  have  noticed  that  the  financing  of  foreign  shipments 
from  Germany  was  attended  to  by  Germans  through  credit 
granted  by  the  export  merchants  to  their  oversea  customers.  The 
time  is  inevitably  coming,  though  it  may  be  distant  as  yet,  when 
the  so-called  export  markets  will  have  become  economically  so 
independent  as  to  be  able  to  finance  their  own  foreign  purchases. 
When  that  day  comes,  the  export  merchant  will  have  ceased  to 
be  an  economic  factor.  Cash  or  short-term  credit  will  prevail, 
and  there  will  be  nothing  in  the  way  of  a  manufacturer  conduct- 
ing a  vastly  increased  direct  business  with  oversea  countries. 

Thus  the  trade  of  Germany  with  the  United  States  before 
the  war  became  a  cash  or  short-term  credit  business.  Middle- 
men, where  used  at  all,  were  used  for  the  sake  of  convenience, 
but  not  for  the  purpose  of  financing  the  trade.  American  cus- 
tomers, therefore,  also  received  the  benefit  of  much  lower  prices 
in  Germany  than  those  quoted  by  Germans  to  their  oversea  cus- 
tomers requiring  long-tenn  credit. 

2.    The  Technique  of  Financing  Foreign  Shipments  in 
Germany. 

In  Chapter  XII,  under  terms  of  payment,  we  discussed  the 
meaning  of  the  various  credit  terms.  We  referred  to  open  cred- 
its and  secured  credits.  We  found  open  credits  proper  to  re- 
late to  individual  transactions.  What  is  known  generally  as  "open 


OPEN  CREDITS  301 

credit"  in  international  commerce,  however,  is  frequently  an  ac- 
count current  relationship. 

Such  open  credit  is  really  a  matter  of  bookkeeping.  The 
merchant  or  manufacturer  supplies  the  goods  to  his  customer, 
debits  him  with  the  amount  of  invoice,  credits  him  with  the 
amount  of  payments,  and  charges  him  interest  for  the  time  the 
credit  is  used.  Open  credit  presupposes  a  thorough  confidence 
reposed  by  the  seller  in  the  buyer. 

What  does  "open  credit"  really  mean?  In  the  relations  be- 
tween the  German  exporters  and  the  importers  in  the  oversa 
countries  it  meant  a  continuous  supplying  of  goods,  subject  to 
notice,  within  the  limits  of  a  certain  agreed  upon  ledger  credit. 
The  credit  agreed  upon  might  be  100,000  marks.  The  customer 
might  order  goods  to  this  amount  paying  when  he  pleased  within 
the  limits  of  a  certain  period,  usually  six  months.  (See  Chapter 
XII.) 

Frequently  the  customer  exceeds  the  limit  agreed  upon.  He 
may  have  ordered  goods  to  the  extent  of  the  credit  granted  him, 
and  before  he  has  had  an  opportunity  to  settle,  he  places  orders 
for  a  further  supply  of  goods,  but  it  is  generally  understood  that 
the  credit  is  to  be  turned  over  at  least  twice  per  annum. 

The  customer  grants  to  the  crditor  a  purchasing  commission 
of  3  to  5  per  cent,  varying  in  accordance  with  the  goods,  which 
would  work  out  in  the  example  assumed  here,  at  about  10  per 
cent  per  annum  on  100,000  marks,  the  credit  being  turned  over 
twice. 

In  addition,  the  customer  pays  interest  from  the  date  of  the 
invoice  or  the  bill  of  lading,  generally  at  6  per  cent  per  annum. 
This  is  the  ruling  rate  of  interest  in  dealings  between  the  Ger- 
man exporters  and  their  customers  overseas.  It  will  be  noted 
that  this  rate  does  not  depend  upon  the  standing  of  the  customers. 
The  varying  degrees  of  the  financial  standing  are  reflected  in 
the  prices  quoted  them,  and  not  in  the  rate  of  interest.  Other  ways 
of  providing  for  the  varying  degrees  of  risk  are  by  an  increase 
in  the  commission,  as  well  as  by  adjusting  the  scope  of  credit 
granted.  Six  months,  as  has  been  mentioned,  is  the  usual  period, 
but  in  many  cases  6  to  9  months  is  granted,  dating  from  the  date 
of  the  invoice  or  of  the  bill  of  lading.  In  order  to  prevent  un- 
warranted excesses  of  the  time  limit,  a  special  commission  of 


302  INTERNATIONAL  COMMERCE 

one-half  to  i  per  cent  on  the  amount  of  the  invoice  is  frequent- 
ly agreed  upon  for  the  extra  time  taken,  or  an  increased  rate  of 
interest  is  stipulated.  On  the  whole,  these  extra  commissions 
and  interest  charges  are  more  in  the  nature  of  a  handle  to  be  used 
for  inducing  promptness  than  a  means  really  resorted  to  in  prac- 
tice. 

The  German  exporter  not  only  charges  his  customer  with 
interest  at  the  rate  of  6  per  cent  on  his  debits,  but  also  credits 
him  at  the  same  rate  of  interest  for  his  credits.  Sometimes  a 
special  arrangement  is  made,  for  the  customer  may  keep  a  credit 
balance  for  a  long  time  with  the  exporter,  while  the  latter  can 
procure  funds  at  a  lower  rate  than  that  he  pays  his  customer. 

In  the  case  of  credit  by  means  of  drafts  it  does  not  often 
happen  that  the  exporter  will  enter  a  contract  to  grant  such  cred- 
its to  any  particular  limit. 

The  foreign  customer  orders  goods  to  a  certain  value,  the 
German  exporter  draws  on  the  customer,  and  when  the  draft  is 
paid  the  debt  of  the  customer  is  extinguished.  It  is  not  usual 
to  include  in  the  credit  the  time  before  the  customer  gets  his 
goods.  The  drafts  are  drawn  at  a  certain  period  after  sight. 
When  the  draft  reaches  the  customer  before  the  arrival  of  the 
goods,  the  acceptance  is  withheld  until  the  goods  arrive.  In  South 
America  the  shipping  documents  are  frequently  delivered  direct 
to  the  customer,  which,  of  course,  is  a  mark  of  great  confidence, 
but  mostly  these  papers  are  sent  to  a  third  party,  a  bank  or  a 
forwarding  agency.  In  this  case,  the  third  party  must  be  noti- 
fied not  to  insist  on  acceptance  until  the  arrival  of  the  goods. 
(The  shipping  documents,  of  course,  include  the  bill  of  lading, 
an  insurance  policy  or  certificate,  and  a  copy  of  the  invoice. 
There  are  in  most  countries  certain  regulations  with  regard  to 
consular  invoices  as  well.)  The  instructions  in  the  case  of  these 
drafts  generally  read:  "Present  for  acceptance  on  the  arrival  of 
steamship ." 

Where  the  draft  is  drawn  payable  at  sight,  no  credit  has 
been  really  granted,  excepting  that  the  exporter  has  undertaken 
to  wait  until  the  goods  reach  the  customer.  Generally  the  draft 
is  drawn  for  a  certain  period  of  time  after  sight,  and  this  length 
of  credit  varies  considerably.  It  depends  upon  the  line  of  goods, 
upon  the  standing  of  the  customer,  upon  a  hundred  and  one  spe- 


DEAFTS  AND  CREDIT  303 

cial  individual  circumstances.  For  this  reason  there  is  no  such 
thing  as  "standard  terms"  in  Germany,  except  along  most  gen- 
eral lines. 

Many  American  manufacturers  do  not  realize  the  essential 
"credit"  element  of  transactions  on  the  basis  of  drafts  drawn  on 
foreign  customers  and  discounted  by  banks.  The  exporter  has  re- 
ceived an  order;  he  purchases  the  goods  covered  by  this  order 
from  the  manufacturer,  and  should  the  customer  change  his 
mind  the  exporter  may  suffer  loss.  Or  the  customer  refuses  to 
accept  the  goods,  and  the  exporter  may  again  suffer  a  loss.  Or 
the  customer  may  accept  the  goods  and  the  draft,  but  fail  to 
pay,  and  the  exporter  once  more  is  the  loser.  In  this  examina- 
tion of  German  methods  we  continually  and  advisedly  speak  of 
"exporters,"  because  the  German  manufacturers  do  very  little 
"direct"  exporting.  We  also  speak  of  "export  markets"  rather 
than  of  "foreign  countries,"  because  of  the  very  marked  dis- 
tinction in  the  status  of  purchases,  on  the  one  hand,  by  manu- 
facturing countries,  such  as  France,  England,  etc.,  and  of  other 
European  countries,  such  as  Denmark  and  Holland,  so  easily 
reached  by  rail  from  Germany,  and,  on  the  other  hand,  with 
China  or  Africa  or  South  America,  which  are  essentially  "ex- 
port markets"  or  "oversea  markets,"  as  the  Germans  call  them, 
and  business  with  which  had  to  be  built  up  through  export  mer- 
chants having  oversea  connections. 

To  return  to  the  credit  element  of  transactions  on  the  basis 
of  drafts  drawn  on  the  customer  abroad,  the  turning  over  of  the 
bill  of  lading  vests  the  property  right  to  the  goods  in  the  cus- 
tomer. The  customer  either  pays  the  value  of  the  draft  in  cash 
("documents  against  payment,"  abbreviated  d/p^  or  accepts  the 
draft  for  payment  at  some  future  date,  which  is  the  more  cus- 
tomary course  ("documents  against  acceptance,"  d/a).  Even  in 
the  case  of  d/p  drafts,  payment  by  the  customer  may  be  post- 
poned ;  instead  of  paying  cash  he  accepts  the  draft  at  one  to  three 
months,  but  neither  the  documents  nor  the  goods  are  turned 
over  to  him.  He  may  want  to  wait  until  he  has  sold  the  goods, 
on  the  basis  of  samples,  perhaps,  and  the  goods  are  warehoused 
until  he  can  pay  the  amount  of  the  draft  into  the  bank  or  to  the 
forwarding  agency.  This  is  frequently  done  in  the  Far  East. 
Here  the  banks  maintain  so-called  "godowns"  for  this  purpose. 


304  INTERNATIONAL  COMMERCE 

The  goods  are  occasionally  turned  over  to  the  customer  for  ware- 
housing purposes  against  the  so-called  "trust  receipt."  One  im- 
portant feature  of  "acceptance"  of  the  draft  by  the  customer  is 
the  fact  that  it  forms  an  acknowledgment  of  indebtedness,  which 
it  is  then  unnecessary  to  prove  item  by  item  in  case  of  litigation. 
In  most  countries  acceptances  are  far  simpler  to  collect  judicially 
than  open  accounts.  When  an  accepted  draft  is  unpaid  it  is 
"protested,"  and  the  debtors  may  be  proceeded  against  without 
further  trouble. 

Frequently  open  accounts  may  be  neglected  by  a  customer 
who  may  find  himself  for  some  reason  short  of  immediately 
available  funds,  but  to  neglect  the  payment  of  an  accepted  draft 
is  regarded  in  the  trade  and  by  banks  as  so  serious  a  matter  that 
the  drawee  would  lose  caste  with  the  banks ;  oversea  buyers  en- 
deavor in  most  cases  to  honor  accepted  drafts. 

While,  as  remarked,  there  is  no  such  thing  as  "standard 
terms,"  whether  granted  by  Germans  or  by  any  other  exporters, 
for  the  reasons  already  mentioned,  certain  general  data  with  re- 
gard to  the  customary  length  of  time  drafts  may  nevertheless 
be  given. 

The  customary  length  of  German  drafts  on  oversea  coun- 
tries before  the  war  is  given  below : 

South  America:  3,  4,  6,  9,  and  12  months;  most  frequently 
3  and  6  months. 

Central  America  and  West  Indies :   4,  6,  and  9  months. 

Australia :  30,  60,  90,  and  120  days. 

China  and  Japan  :  Mostly  3  months ;  also  2,  4,  and  6  months. 

Dutch  East  Indies  and  Straits  Settlements :  30,  60,  90,  and 
120  days,  up  to  6  months. 

British  India:   30,  60,  90,  and  120  days. 

South  Africa:   60,  90,  and  120  days,  up  to  6  months. 

West  Africa  and  East  Africa:   30,  60,  90,  and  120  days. 

Northern  Africa  and  Asia  Minor:   4  to  9  months. 

Drafts,  even  if  drawn  and  accepted  for  a  certain  time  "after 
sight,"  were  frequently  extended  and  renewed  by  German  credit- 
ors. German  exporters  were  also  occasionally  forced  to  sue  be- 
cause of  non-payment  of  accepted  drafts,  in  the  case  of  sales 
to  financially  weak  concerns  or  firms  whose  standing  had  under- 
gone a  sudden  deterioration.     Business  on  the  basis  of  "drafts," 


STERLING  DRAFTS  305 

even  if  discounted  by  banks,  is  always  a  credit  business  and  not 
a  cash  business,  as  is  imagined  by  many  American  manufac- 
turers. 

Payment  is  the  final  element  concluding  a  credit  transaction. 
In  the  case  of  open  credit,  it  was  customary  in  the  early  stages 
of  the  export  trade  to  wipe  off  debits  for  goods  shipped  by  cred- 
its in  the  shape  of  shipments  of  native  produce.  The  value  of 
the  shipments  going  either  way  had  to  be  booked  in  some  cur- 
rency agreed  upon.  We  will  see  later,  when  we  come  to  discuss 
the  position  of  London  as  the  center  of  the  foreign  exchange, 
what  causes  contributed  to  the  domination  of  the  sterling  cur- 
rency, the  English  pounds  sterling,  in  international  financial 
transactions.  In  Germany  the  currencies  in  which  export  ship- 
ments were  paid  before  the  war,  and  had  been  for  some  time, 
were  the  German,  the  English,  and  the  French.  Until  1873  a^  tne 
transactions  between  German  exporters  and  their  independent 
customers  overseas  were  in  pounds  sterling,  while  with  their  own 
branches  they  were  booked  in  marks. 

At  this  point  the  reasons  why  the  German  exporters  found 
it  necessary  to  adopt  the  sterling  currency  in  their  dealings  with 
oversea  customers  may  be  stated.  In  the  first  instance,  the  Ham- 
burg exporters  had  originally  to  pay  in  pounds  sterling  for  the 
goods  sent  overseas.  They  bought  goods  for  oversea  shipment 
in  London.  The  foreign  customer  sent  native  produce  in  pay- 
ment, and  the  German  exporter  sold  this  produce  mostly  to 
England.  The  customer  had  also  opportunities  of  settling  his  in- 
debtedness with  the  German  exporter  by  purchasing  locally  a 
bills  on  London,  they  being  just  as  good  as  cash.  These  bills 
creditors  of  English  importers  in  connection  with  their  own  ship- 
ments to  England.  The  German  merchant  eagerly  accepted  these 
bills  on  London,  they  being  just  as  good  as  cash.  These  bills 
on  London  were  readily  convertible  into  marks,  or  he  could  use 
them  to  pay  for  his  own  purchases  in  England.  In  the  course  of 
time  the  German  mark  gained  a  prominent  place  alongside  of 
the  sterling  in  German  oversea  transactions,  particularly  since 
German  products  and  manufacturers  began  to  play  an  increasing- 
ly important  part  in  the  range  of  German  exports.  Still,  owing 
to  London's  eminent  position  in  the  world  market  and  the  pre- 
ference of  oversea  customers,  the  sterling  currency,  which  was 


306  INTERNATIONAL  COMMERCE 

a  perfectly  well-known  quantity  overseas,  was  almost  universally 
used  by  German  exporters  in  their  dealings  with  Australia,  South 
Africa,  China,  Japan,  and  the  British  and  Portuguese  colonies 
in  Africa.  The  mark  was  used  to  a  larger  extent  than  the  ster- 
ling in  German  dealings  with  South  American  countries.  It  was 
almost  exclusively  used  in  transactions  with  the  exporters'  own 
branches  overseas.  In  dealing  with  Egypt,  Morocco,  and  Asia 
Minor  the  German  exporters  employed  the  French  currency. 

The  oversea  customer,  being  frequently  an  exporter  of  native 
produce,  used  his  exports  to  pay  his  indebtedness  to  the  German 
creditor.  The  creditor  received  the  bills  of  lading,  sold  the  goods, 
credited  his  oversea  connections  with  the  proceeds,  deducting  his 
selling  commission  of  I  to  3  per  cent,  his  brokerage  of  one-half 
of  1  to  IV2  per  cent,  and  other  expenses.  The  recipient  of  this 
class  of  native  produce  claimed  no  credit  for  himself,  it  being 
in  the  nature  of  so-called  cash  lines. 

But  in  the  course  of  time  it  became  more  customary  to  make 
settlement  for  these  open-credit  transactions  by  means  of  remit- 
tances, either  by  cable  or  by  mail.  The  debtor  could  procure  his 
remittance  for  the  purpose  of  such  settlements  either  from  the 
local  banks  catering  to  foreign  trade,  or  from  the  great  local 
wholesale  houses  which  may  have  still  retained  the  banking  fea- 
ture, once  a  prominent  characteristic  of  these  houses,  or  from 
local  exporters  of  native  produce  who  may  have  become  creditors 
of  European  importers. 

Cable  transfers  of  money  were  used  when  the  debtor  wished 
to  utilize  his  time  limit  to  the  utmost.  He  might  have  to  settle  his 
indebtedness  in  9  months,  and  the  remittance  might  take  30  days 
to  reach  the  creditor.  By  means  of  cable  transfer  he  could  sec- 
ure an  extra  30  days'  time.  Frequently  the  extra  cost  of  cable 
transfer  was  less  than  the  saving  in  interest. 

In  the  case  of  mail  remittances,  the  oversea  customer  in- 
structed a  business  house  with  which  he  may  have  acquired  a 
credit  through  purchase  of  a  bill  to  pay  a  sum  of  money  to  the 
firm  to  which  he  was  indebted,  or  he  could  buy  from  a  local 
oversea  bank  an  order  on  its  European  branch  or  correspondent, 
whence  money  was  transmitted  to  the  exporter. 

These  bills  of  oversea  customers  were  drawn,  therefore,  on 
business  houses  or  banks,  were  presented  to  them  for  acceptance, 


GEEMAN  ACCEPTANCE  PRACTICE  307 

and,  according  to  their  nature  as  sight  bills,  30,  60,  or  90  days' 
bills,  were  either  cashed,  held  for  maturity,  or  discounted.  The 
bills  received  in  Germany  as  remittances  for  open-credit  trans- 
actions were  principally  bills  on  the  great  Hamburg  bankers, 
bills  on  Hamburg  branches  of  London  banks,  also  on  first-class 
private  bankers  and  the  so-called  merchant  bankers. 

The  rate  of  discount  for  prime  paper  of  tiiis  description  was 
arrived  at  in  the  Hamburg  private  discount  market  as  the  result 
of  private  conferences  by  the  banks'  exchange  managers,  there 
being  two  rates,  one  for  bankers'  acceptances  and  another  for 
first-class  commercial  bills.  Bills  of  minor  bankers  were  veiy 
carefully  scrutinized  in  the  discount  market,  both  with  regard  to 
the  standing  of  the  acceptor  and  the  drawee.  The  standing  of 
the  drawer  in  this  case  was  of  little  importance. 

In  Berlin  only  the  so-called  great  banks  were  interested  in 
discounting  these  foreign  bills.  Berlin's  private  bankers  paid 
much  less  attention  to  the  financing  of  foreign  business  than 
the  Hamburg  bankers. 

It  has  been  mentioned  that  the  mark  gained  a  prominent 
position  alongside  the  sterling  in  German  oversea  transactions, 
but  the  sterling  remittances  via  London  overshadowed  the  mark 
remittances  on  Hamburg  or  Berlin  even  in  the  last  years  of 
Germany's  pre-war  export  trade.  The  bills  in  either  instance 
were  generally  90  days'  sight  bills.  Occasionally  bills  on  Man- 
chester and  Liverpool  business  houses  were  received  in  Germany, 
but  they  were  less  eagerly  sought  than  remittances  on  the  London 
banks  and  merchant  bankers. 

The  remittance  bills  were  frequently,  in  fact  generally,  sold 
before  the  drawee's  acceptance  had  been  secured,  the  buyer  re- 
lying on  the  indorsement  of  the  seller,  whose  liability  was  estab- 
lished by  law,  but  when  the  exchange  happened  to  be  unfavorable 
the  seller  could  present  the  bill  for  acceptance  and  wait  for  a 
favorable  opportunity  before  selling  it.  Next  to  bills  on  London, 
the  favorite  remittances  in  Germany  were  on  Paris,  and  there 
were  occasionally  some  bills  on  the  United  States  and  other  coun- 
tries. These  were  used  rarely  in  settlements  with  Germany,  as 
the  remitter  could  mostly  dispose  of  them  to  better  advantage 
at  home  and  purchase  London  or  Hamburg  bills. 

The  Hamburg  exporter  who  wished  to  convert  his  time  bills 


308  INTERNATIONAL  COMMERCE 

into  cash  used  the  services  of  the  bank  or  of  the  bill  broker. 
In  this  instance  the  bill  broker's  services  went  somewhat  beyond 
what  is  generally  understood  under  such  functions ;  he  not  only 
acted  as  a  link  between  the  demand  and  the  supply  for  drafts, 
but  by  indorsing  same  became  a  guarantor.  In  fact,  some  of  the 
wealthier  German  brokers  bought  time  drafts  for  their  own  ac- 
count as  an  investment,  disposing  of  them  as  the  market  may 
favor  them  in  such  transactions. 

Unsold  bills  were  frequently  sent  by  German  exporters  to 
London  and  Paris  to  make  up  payments  or  to  have  them  dis- 
counted at  a  special  rate  of  discount  with  the  exporters'  private 
banking  connections. 

The  exporter  debited  his  oversea  customer  with  interest  at 
the  rate  of  6  per  cent  until  the  day  the  bill  matured  although 
he  could  discount  the  same  at  any  time,  and  any  margin  secured 
thereby  formed  one  of  the  exporter's  profits. 

We  have  been  speaking  of  payment  by  the  foreign  customer 
in  the  shape  of  remittances  sent  to  Germany,  and  will  now  take 
up  the  German  methods  of  dealing  with  drafts  drawn  on  for- 
eign countries.  Naturally  much  of  what  is  said  regarding  drafts 
drawn  by  German  parallels  the  practice  in  the  United  States. 

First  to  be  considered  is  the  manner  of  drawing  drafts  and 
then  the  subject  of  German  banks  catering  to  the  oversea  trade. 
Only  when  the  position  of  these  banks  is  clearly  understood  is 
it  possible  to  realize  the  advantages  possessed  by  the  Germans  in 
granting  credit  abroad. 

In  financial  transactions  between  parties  residing  in  two  dif- 
ferent countries  payment  may  be  effected  in  the  funds  current 
in  the  land  where  the  debtor  resides,  or  in  the  currency  of  the 
creditor's  country,  or  in  some  other  currency  agreed  upon.  The 
debtor  abroad  is  expected  to  furnish  the  equivalent  of  the  draft, 
either  in  the  currency  in  which  it  is  drawn  or  in  his  own  national 
funds  forming  an  equivalent.  The  prevalence  of  the  sterling 
currency  in  oversea  transactions,  which  has  attained  an  inter- 
national character,  such  as,  for  instance,  a  universal  international 
language  might  have,  is  responsible  for  the  almost  universal  use 
at  one  time  of  the  sterling  as  the  currency  of  foreign  drafts. 

The  Germans  drew  in  sterling  on  customers  in  Australia, 
vSouth  Africa,  and  other  English  colonies.    With  regard  to  other 


CURRENCY  OF  DRAFTS  309 

countries,  they  differentiated  between  colonies  of  European  na- 
tions having  a  gold  standard  (drawing  on  these  colonies  in  their 
national  currency),  countries  having  a  gold  exchange,  and  those 
whose  national  currency  was  subject  to  fluctuations.  While  South 
American  States  still  held  to  the  unstable  paper  currency,  the 
Germans  never  drew  drafts  in  South  American  money.  Even 
later  they  seldom  did  so,  and  where  they  did,  they  expressly 
called  for  payment  in  gold. 

With  regard  to  the  Asiatic  trade,  in  India  the  rupee  having 
been  stabilized,  there  were  many  German  drafts  in  rupees ;  Japan 
also  introduced  the  gold  standard.  The  fluctuations  both  in  rupees 
and  in  yen  being  slight,  the  exporter  could  draw  in  both  cur- 
rencies without  risk.  China  is  the  only  great  Asiatic  country 
with  an  unstable  currency. 

In  the  days  when  the  rupee  was  an  uncertain  quantity  the 
German  exporter  was  accustomed  to  take  out  an  exchange  in- 
surance to  protect  himself  against  possible  loss.  This  insurance 
was  effected  by  the  English  banks  with  Indian  branches.  The 
European  offices  of  these  banks  paid  the  German  exporters  in 
gold.  The  important  position  of  the  rupee  in  the  German-Indian 
trade  relations  was  due  to  the  fact  that  the  banks  would  not  un- 
dertake to  insure  the  native  Indian  buyer  against  exchange  fluc- 
tuation, but  were  willing  to  extend  this  accomodation  to  the 
German,  and,  on  the  other  hand,  figuring  in  rupees  was  an  easier 
matter  for  the  native  Indian  customers.  This  desire  to  avoid 
figuring  and  calculating  has  brought  about  the  so-called  "all- 
round  rates,"  which  we  might  call  "laid-down  rates,"  forming 
a  price  including  transport  and  insurance,  landing  and  customs 
charges,  exporter's  profit,  and  the  commission  of  two  brokers, 
the  selling  commission  of  the  buyer  in  India,  and  the  discount 
he  would  have  to  grant  to  his  own  customer.  The  willingness 
of  the  Germans  to  meet  the  needs  of  their  customers  abroad  is 
exemplified  in  this  laborious  price  calculation  for  the  benefit  of 
the  native  Indians.  It  was  certainly  one  of  the  many  causes  of 
the  growth  of  the  German  trade. 

To  sum  up,  with  regard  to  currency  in  which  the  Germans 
drew  their  drafts,  it  may  be  said  that  the  Germans  drew  in 
pounds  sterling  on  the  Far  East  and  West  Africa,  as  well  as  on 
most  British  colonies,  in  pounds  sterling  and  marks  on  Central 


310  INTERNATIONAL  COMMERCE 

and  South  America,  in  rupees  on  India  and  East  Africa,  in  francs 
on  Asia  Minor  and  North  Africa. 

A  debtor  in  Cape  Town,  on  whom  a  German  exporter  drew 
for  £1,000,  paid  the  banker  presenting  him  with  the  draft  the 
sum  of  £1,000  sterling,  if  we  ignore  for  the  moment  such  details 
as  the  banker's  charges,  and  the  transaction  was  completed.  But 
a  debtor  in  Buenos  Aires  to  whom  a  similar  draft  was  presented 
had  to  give  the  banker  an  equivalent,  that  is,  enough  Argentine 
pesos  to  make  up,  when  remitted  to  Europe  by  draft,  £1,000. 
What  was  the  value  of  £1,000  sterling  in  Buenos  Aires  at  the 
time  the  draft  was  presented?  The  current  exchange  rate  de- 
cided this  question.  Now,  there  is  in  Buenos  Aires  a  rate  for 
sterling  drafts  drawn  at  sight  and  one  for  drafts  drawn  at  90 
days.  The  debtor  must  pay  out  more  of  his  national  currency 
when  figuring  at  the  sight-draft  basis  than  when  figuring  at  a 
90  days'  sight  draft  basis,  and  therefore  he  prefers  a  later  sight. 
If  the  conversion  basis  favors  the  debtor  it  is  less  advantageous 
for  the  creditor  and  vice  versa.  For  this  reason  the  drawer  of 
the  draft  in  Germany  incorporated  some  such  clause  in  the  draft 
as  "payable  in  the  national  currency  at  the  drawing  rate  for  90 
days'  sight  drafts  on  Hamburg,  London,  or  Paris,"  in  accordance 
with  the  currency  in  which  the  draft  was  made  out.  To  make  this 
clear,  the  drawer  drew  in  pounds  sterling,  marks,  or  francs.  The 
drawee  furnished  his  own  national  currency.  This  currency 
must  be  remitted  by  the  banker  to  the  drawer  in  the  funds  asked 
for  in  the  draft.  The  conversion  of  the  national  currency  into 
that  of  the  draft  was  made  at  the  current  rate  for  which  bills 
could  be  bought  locally  on  London,  Hamburg,  or  Paris.  And 
it  cost  the  x\rgentine  buyer  less  to  buy  a  90  days'  bill  on  those 
places   than  a  sight  bill. 

When  the  accepted  draft  matured  it  was  presented  to  the 
drawee  for  payment.  It  was  generally  provided  in  the  draft  that 
the  payment  was  to  be  made  at  the  drawing  rate  of  the  bank 
presenting  the  draft,  or  he  could  be  forced  to  furnish  a  bank 
draft  drawn  by  an  oversea  bank  on  a  European  bank. 

It  frequently  happened  that  there  were  no  banks  in  the  place 
in  which  the  debtor  resided  in  which  case  (and  also  frequently 
otherwise  in  the  transactions  between  German  exporters  and 
customers  in  South  America)  the  debtor  was  free  to  buy  remit- 


GERMAN  DRAFT  TECHNIQUE  311 

tances  in  the  open  market.  This  was  very  rarely  done  outside  of 
South  America  in  dealings  with  the  German  manufacturers.  It 
was  only  in  South  America  that  the  German  exporter  was  likely 
to  do  business  with  a  customer  located  where  there  were  no  bank- 
ing accommodations.  In  the  Far  East  the  German  exporter  dealt 
only  with  a  few  prominent  centers ;  In  Australia  and  South 
Africa  there  was  a  network  of  banks. 

When  the  German  drew  his  drafts  on  an  oversea  customer 
he  figured  the  loss  of  interest  suffered  by  him  in  connection  with 
the  particular  credit.  He  figured  time  lost  in  transit,  in  round 
figures,  as  so  many  one-fourth  and  one-half  months.  Particularly 
when  the  goods  were  shipped  in  a  sailing  ship,  there  was  no  tell- 
ing when  they  might  reach  the  consignee,  although  he  may  have 
accepted  the  draft  on  the  arrival  of  the  mail  steamer.  Some- 
times a  draft  was  drawn  payable  at  a  certain  date,  when  the 
interest  calculation  was  an  easy  matter,  or  again  an  agreement 
could  be  made  whereby  the  drawee  was  debited  with  the  in- 
terest for  the  time  passed  until  acceptance.  Then  the  drawer 
figured  the  period  of  credit  granted.  The  last  item  the  drawer 
had  in  mind  was  the  time  elapsing  before  the  funds  reached  the 
creditor. 

When  payment  was  made  by  a  cable  transfer  the  last  ele- 
ment was  omitted.  If  the  amount  of  the  draft  was  settled  by  a 
bill  payable  so-and-so  many  days  after  sight,  this  element  post- 
poning the  actual  receipt  of  funds  by  the  creditor  was  also  taken 
into  consideration.  To  sum  up,  then,  the  drawer  figured  the  time 
of  transit,  the  time  to  maturity  of  draft,  the  time  of  return 
voyage,  and  possibly  the  time  to  maturity  of  bill  sent  in  settle- 
ment. The  rate  of  interest  was  practically  always  6  per  cent  per 
annum.  For  the  remittance  sent  in  settlement  frequently  a  lower 
rate,  based  on  the  bank  discount,  was  figured. 

For  certain  countries  the  interest  was  not  included  in  the 
face  amount  of  the  draft,  being  figured  and  accounted  for  sepa- 
rately. A  special  clause  in  the  draft  provided  for  this.  The 
practice  was  general  when  dealing  with  English  colonies  having 
a  sterling  currency,  with  India,  and  with  the  Far  East. 

Returning  to  the  example  of  a  draft  for  £1,000  sterling  on 
Cape  Town;  when  this  amount  was  paid  at  Cape  Town  it  was 
worth  less  to  the  German  exporter  than  a  check  for  the  same 


312  INTERNATIONAL  COMMERCE 

amount  payable  in  Hamburg.  The  banks  buying  drafts  on  South 
Africa  and  Australia  enabled  the  exporter  to  provide  for  loss  of 
interest,  etc.,  by  publishing  rates  at  which  they  purchased  these 
drafts.  From  these  rates  the  exporter  could  see  how  much  short 
of  £1,000  the  sum  would  be  which  he  would  eventually  receive. 
But  the  rate  of  exchange  might  alter  by  the  time  payment  was 
made,  and  therefore  these  drafts  on  South  Africa  and  Australia 
were  made  out  with  the  so-called  exchange  stipulation,  reading 
"payable  with  exchange  for  negotiating  bills  on  colonies  and  all 
stamp  duties."  Or  the  draft  was  made  out  "exchange  to  be 
added,"  and  the  exporter  included  the  amount  of  stamps  in  the 
face  value  of  the  draft. 

Similarly  the  banks  published  the  rate  of  interest  when  buying 
drafts  in  European  currency  on  Far  East  points.  By  adding  the 
clause  to  the  draft  "payable  with  interest  at  —  per  cent  per  an- 
num, added  thereto,  from  date  hereof  to  approximate  date  of 
arrival  of  remittance"  in  Hamburg  or  London,  as  the  case  may 
be  (marks  or  pounds  sterling),  the  exporter  could  dictate  the  rate 
of  interest  for  the  debtor.  If  he  were  to  lessen  this  rate  of  in- 
terest, the  exporter  might  receive  from  the  bank  less  than  the 
face  value  of  the  draft. 

Where  in  the  Far  East  the  drawee  received  the  documents 
"against  payment"  of  the  draft  (d/p  terms)  instead  of  "against 
acceptance"  (d/a  terms)  he  was  entitled  to  "rates  of  rebate,"  or 
the  "repay,"  in  accordance  with  such  rates  published  by  the  local 
banks,  in  case  he  paid  before  the  draft  is  due.  The  drawer  had 
nothing  to  say  in  this  matter,  and  the  little  differences,  together 
with  the  discount  rates,  formed  the  profit  of  the  banks. 

In  Central  and  South  America,  North  Africa,  West  Africa, 
and  East  Africa  these  rebates  were  agreed  upon  between  the 
drawer  and  the  drawee.  It  was  customary  to  rebate  one-half  of 
i  per  cent  per  month  (6  per  cent  per  annum)  for  such  payment 
ahead  of  the  date  of  the  draft. 

If  the  draft  was  made  out  in  the  currency  of  the  drawee's 
land,  the  drawee  paid  the  amount  called  for  and  the  bank  present- 
ing the  draft  remitted  it  to  the  German  exporter.  If  in  foreign 
currency,  the  drawee  supplied  the  bill  which  the  bank  presenting 
sent  on  to  the  exporter.  Or,  mostly,  he  paid  the  bank  in  accord- 
ance with  the  prevailing  rate  of  exchange,  in  which  case  the 


GERMAN  DEAFT  TECHNIQUE  313 

bank  sent  its  own  remittance,  in  the  shape  of  a  check  or  90 
days'  sight  draft  on  an  English,  German,  or  French  place.  This 
was  the  most  customary  method,  being  drafts  drawn  by  oversea 
banks  on  European  banks.  The  European  bank  notified  the  ex- 
porter of  the  receipt  of  settlement.  If  the  remittance  was  in 
the  shape  of  a  Hamburg  check,  it  turned  over  the  amount  to  the 
exporter;  if  a  time  draft,  it  discounted  same.  If  the  remittances 
were  on  Hamburg  and  Berlin,  the  regular  rate  of  discount  was 
deducted  where  no  special  agreement  was  made;  but  since  these 
were  first-class  bankers'  drafts,  the  agreement  was  made  fre- 
quently by  which  the  banks  gave  the  exporter  the  benefit  of  a 
special  private  discount.  Remittances  on  Paris  and  London  at 
three  months  were  also  generally  accounted  for  immediately.  But 
when  the  exporter  needed  foreign  bills  more  than  domestic  money, 
he  sent  these  Paris  and  London  bills  on  to  his  foreign  banking 
connections.  The  difference  between  the  interest  for  the  three 
months  such  remittances  generally  ran  and  the  discount  rate  and 
the  differences  between  the  bank  discount  rate  and  the  private 
discount  rate  were  items  of  some  minor  importance  which  the 
shrewd  exporters  calculated  for  the  increase  of  their  profits. 

Doing  business  by  means  of  drafts  drawn  on  customers 
necessitates  the  mediation  of  banks.  A  third  party  is  expected 
to  be  entrusted  with  the  shipping  documents  which  are  to  be 
handed  over  to  the  customer  on  the  performance  of  certain  duties 
and  finally  to  receive  payment.  This  third  party,  as  the  holder 
of  documents  indorsed  in  blank,  has  the  right  to  receive  the 
goods.  Where  the  draft  is  drawn  to  the  order  of  this  third  party 
it  has  the  right  to  demand  payment  as  an  indorser.  It  receives 
payment  in  place  of  the  creditor. 

Such  third  parties  may  be  the  managers  of  the  exporter's 
own  branches  oversea,  his  agents,  his  business  friends,  occasion- 
ally traveling  salesmen.  But  they  were  principally  the  oversea 
branches  of  German  banks  doing  a  foreign  business  or  local  for- 
eign banks  which  were  engaged  in  this  business  for  German  ex- 
porters. The  exporter  sent  the  draft  with  the  documents  to  the 
bank  overseas,  or — which  is  the  more  customary  method — he 
turned  over  the  draft  to  a  bank  at  home.  The  home  bank 
and  the  foreign  branch  or  correspondent  were  from  the  point 
of  view  of  German  commercial  law  one  juridical  person.     In  the 


314  INTEENATIONAL  COMMERCE 

case  of  exporters  located  away  from  Hamburg  and  Berlin  it 
was  customary  to  turn  over  the  draft  to  a  home  bank,  whether 
or  not  it  had  a  foreign  agency  or  correspondent,  and  in  the  last 
named  case  the  local  bank  made  use  of  the  mediation  of  another 
bank  in  Hamburg  or  Berlin  which  had  agencies  or  correspond- 
ents overseas. 

Mostly  the  drafts  drawn  by  German  exporters  went  to  the 
European  branches  or  agencies  of  oversea  banks.  At  one  time 
to  say  this  was  equivalent  to  saying  that  the  drafts  went  to 
London.  When  the  German  banking  system  is  discussed  we 
shall  see  how  the  organization  of  the  German  foreign  banks  con- 
tributed to  freeing  Germany,  at  least  in  some  measure,  from  ab- 
solute dependence  on  London  in  the  financing  of  foreign  ship- 
ments. 

In  latter  years  the  Hamburg  exporter  turned  over  his  draft 
to  a  bank  in  Hamburg.  Here  the  German  banks  doing  an  over- 
sea business  had  important  branches;  English  foreign  banks 
were  also  represented  by  agencies.  Colonial  and  oversea  banks 
were  represented  in  Hamburg  through  arrangements  with  banks 
domiciled  in  that  city. 

Thus  to  the  extent  that  the  Hamburg  exporter  used  the 
English  bank  agency  at  Hamburg  the  entire  profit  still  added  to 
the  tribute  paid  to  England  as  the  great  financier  of  foreign 
business,  but  the  monopoly  was  no  longer  absolute  immediately 
before  the  war. 

The  costs  of  collecting  the  draft  were  composed  of  the  fol- 
lowing items :  the  commission  for  the  collection,  postage,  and 
ievenue-stamp  taxes.  The  latter  included  the  German  revenue 
stamp,  the  revenue  stamp  of  the  country  where  the  collection 
was  made,  and,  where  the  proceeds  were  returned  in  the  shape 
of  a  counter  remittance,  the  stamps  on  the  latter.  The  last-named 
item,  of  course,  refers  to  drafts  drawn  payable  a  certain  time 
after  sight.  The  postage  item  was  specially  figured  on  each 
transaction.  The  rates  for  collection  were  published  by  banks 
in  the  form  of  special  tariffs. 

These  rates  differed  as  the  result  of  competition  and  also 
depended  on  the  costs  of  the  bank.  Therefore  rates  for  distant 
points  were  higher.  In  minor  oversea  points  the  bank  used  the 
services  of  agents  and  correspondents.     The  charges  of  the  lat- 


GERMAN  DRAFT  TECHNIQUE  315 

ter  were  generally  included  in  the  rates,  but  in  some  exceptional 
cases  they  figured  as  additional  items. 

The  rates  to  export  markets  varied  from  one-eighth  of  i 
per  cent  to  2  per  cent;  one-fourth  to  one-half  of  1  per  cent  was 
most  usual.  A  minimum  flat  rate  was  always  stipulated,  varying 
•  from  1  to  7.50  marks,  in  accordance  with  the  locality  on  which 
the  draft  was  drawn,  and  was  mostly  from  2  to  3.50  marks. 

If  the  draft  was  not  honored  at  maturity  the  entire  collec- 
tion charges  were  borne  by  the  exporter.  To  these  had  to  be 
added  the  costs  of  protest  and  other  expenses.  In  some  rare 
instances  the  banks  conceded  50  per  cent  of  the  charges  in  the 
event  of  non-collection. 

The  draft,  as  already  mentioned,  was  accompanied  by  in- 
structions with  regard  to  the  time  of  presentation  (in  the  event 
of  the  draft  arriving  earlier  than  the  goods),  with  regard  to 
the  turning  over  of  documents  (either  against  acceptance  or 
against  payment),  with  regard  to  protests  and  the  disposal  of  the 
draft  if  dishonored,  as  well  as  with  regard  to  the  disposal  of  the 
shipment  in  the  event  of  non-acceptance.  The  oversea  bank  re- 
ceived the  sum  due  and  furnished  the  drawee  with  the  counter 
remittance,  where  the  draft  was  drawn  in  the  drawee's  currency, 
or  in  some  rare  instances  received  from  the  drawee  a  remittance 
procured  in  the  local  market.  When  the  European  bank  turned 
over  the  proceeds  to  the  drawer  the  transaction  was  completed. 

In  the  case  of  credits  extended  by  means  of  drafts  the  capi- 
tal of  the  exporter  is  tied  up  from  the  moment  he  has  paid  the 
manufacturer's  invoice  until  the  proceeds  are  received  by  him. 
In  the  rare  instances  where  the  German  manufacturer  sold 
overseas  direct,  the  capital  was  tied  up  from  the  date  of  the  in- 
voice.   The  remittance  released  the  tied  up  capital. 

There  are,  however,  two  ways  in  which  the  drawer  can 
come  to  his  money  sooner  than  in  the  course  of  events  leading 
to  the  receipt  of  final  proceeds  of  the  draft.  These  methods 
consist  of  advances  on  drafts  and  of  the  discount  of.  drafts  by 
banks.  Both  of  these  transactions  formed  the  bulk  of  the  busi- 
ness of  the  German  oversea  banks. 

The  German  banks  doing  business  with  the  Far  East  and 


316  INTERNATIONAL  COMMERCE 

the  British  colonies  were  the  principal  buyers  of  drafts  in  Ger- 
many. The  German  banks  operating  with  Central  and  South 
America  were  the  principal  advancers  on  drafts  in  addition  to 
acting  purely  as  collectors  of  drafts. 

While  ordinary  bank  credit  is  based  solely  on  the  standing 
of  the  person  to  whom  credit  is  granted,  credit  in  connection 
with  documentary  drafts  finds  its  material  basis  in  the  shipment 
against  which  the  seller  draws  on  the  buyer.  The  advance  made 
on  a  draft  is  in  Germany  from  50  to  90  per  cent  of  the  amount 
of  the  invoice,  mostly  65  to  70  per  cent,  and  in  England  up  to 
95  per  cent.  The  smaller  the  amount  given  as  advance,  the  bet- 
ter secured  is  the  bank.  The  bank  retains  a  lien  on  the  goods, 
and  in  the  case  of  trouble  with  the  drawee  it  can  dispose  of  the 
goods.  Therefore  it  depends  upon  the  nature  of  the  goods  how 
high  the  advance  made  by  the  bank  will  be.  Staple  articles  com- 
mand a  higher  position  in  this  connection;  textiles,  being  sub- 
ject to  changes  or  fashion,  as  well  as  other  vicissitudes,  are  con- 
sidered by  banks  a  lower  form  of  security.  Where  the  docu- 
ments are  turned  over  to  the  drawee  against  payment,  this,  of 
course,  fully  secures  the  bank,  but  when  they  are  turned  over 
against  acceptance,  the  latter  assumes  the  place  of  security  in- 
stead of  the  shipment. 

The  bank  is,  however,  chiefly  secured  by  the  financial  res- 
ponsibility of  the  drawer  to  whom  an  advance  is  made.  In  case 
of  any  trouble  with  the  drawee,  the  bank  takes  recourse  to  the 
firm  to  whom  the  advance  was  made,  and  only  when  this  step 
is  without  success  will  the  bank  undertake  to  make  use  of  its 
right  of  lien  and  sell  the  goods,  if  it  still  has  possession  of  same. 

These  advances  bore  interest  at  a  special  rate,  based  on  the 
loan  rate  of  the  Reichsbank,  which  was  generally  about  1  per 
cent  above  the  bank  discount  rate.  The  banks  generally  insisted 
on  a  minimum  interest  rate  and  charged  1  per  cent  above  the 
loan  rate  of  the  Reichsbank.  The  advance  commission  was  be- 
tween one-eigth  and  one-sixth  of  1  per  cent  for  the  calendar 
month.  The  collection  charges  were  either  based  on  the  pub- 
lished tariff  or  were  subject  to  a  special  50  per  cent  reduction 
in  the  case  of  drafts  on  which  advance  had  been  made.  In  deal- 
ings with  the  Far  East  sometimes  the  oversea  bank  loan  rate 


ADVANCES  ON  DRAFTS  317 

was  taken  as  a  basis,  and  occasionally  in  these  cases  the  bank 
made  no  charge  for  collection  or  postage. 

The  advance  may  be  made  on  an  individual  transaction,  in 
which  case  the  receipt  of  final  proceeds  terminates  it.  The  ex- 
porter is  then  credited  with  the  amount  of  the  draft  plus  interest 
paid  by  the  drawee,  less  the  commission  for  collection,  postage, 
and  revenue  stamps.  He  is  debited  with  the  advance  plus  in- 
terest until  maturity  and  commission  on  the  advance.  The  bal- 
ance is  paid  over  to  the  exporter. 

Advances  may  also  be  made  currently  and  a  regular  advance 
account  may  be  opened  by  the  bank  for  the  exporter.  Generally 
a  maximum  amount  of  current  advances  is  agreed  upon.  The 
bank  may  grant  the  advance  in  cash,  or  it  will  permit  the  ex- 
porter to  draw  on  it  at  90  days'  sight.  An  acceptance  commis- 
sion of  one-fourth  to  one-half  of  1  per  cent  is  charged  and  the 
exporter  disposes  of  the  paper  in  the  private  discount  market. 
This  is  a  facility  which  the  American  exporter  lacked  entirely 
before  1914,  as  it  was  not  customary  for  American  banks  to 
create  instruments  of  credit  by  stamping  their  acceptance  on 
drafts.  This  kind  of  credit  is  much  less  expensive  than  advance 
credit  proper.  Both  the  German  and  the  English  oversea  banks 
make  a  specialty  of  this  class  of  credit,  and  the  English  private 
discount  rate  is  generally  much  more  favorable  for  the  exporter 
than  the  German  rate. 

In  addition  to  advances  on  drafts,  the  German  banks  made 
advances  on  documents  alone,  mostly  in  the  case  of  consign- 
ments sent  by  German  exporters  to  their  branches  oversea.  The 
goods  are  practically  mortgaged  to  the  bank,  which  obtains  a 
letter  of  lien  from  the  consignee,  forming  thet  bank's  security  in 
place  of  the  acceptance,  and  the  consignee  keeps  a  separate  ac- 
count for  these  goods,  being  bound  to  turn  over  the  proceeds 
to  the  bank  as  soon  as  received.  The  consignee  states  in  his  letter 
of  lien :  "  I  hereby  engage  to  receive  and  hold  the  said  goods 
in  trust  on  your  behalf  and  to  remit  the  proceeds  as  and  when 
sold  direct  to  you." 

In  addition  to  advances  made  by  banks  on  drafts,  drafts  are 
occasionally,  but  rarely,  bought  by  them  outright.  These  drafts 
are  generally  in  a  currency  foreign  to  that  predominant  in  the 
land  of  the  drawee.    The  draft  bears  but  one  signature,  that  of 


318  INTERNATIONAL  COMMERCE 

the  drawer.  The  responsibility  of  the  drawer  is  the  essential 
security.  The  place  of  the  second  signature  is  taken  by  the  pos- 
session of  the  documents  in  the  hands  of  the  bank.  In  the  Far 
East  business  the  bank  is  at  liberty  to  turn  over  the  documents 
to  the  buyer  either  against  payment  or  against  the  acceptance 
of  draft,  as  it  prefers.  The  bank  does  not  buy  this  class  of  drafts 
to  sell  them  again,  but  as  a  profitable  investment. 

The  business  of  buying  drafts  differs  in  the  following  three 
great  oversea  groups :  Central  and  South  America,  India  and 
the  Far  East,  and  the  British  colonies.  Owing  to  the  prevalence 
of  open  credit,  the  buying  of  drafts  is  least  extensive  in  the  first 
of  these  markets.  Again,  this  portion  of  the  export  field  demands 
the  longest  credits.  Taking  a  six  months'  draft  on  Brazil,  it  re- 
quires seven  months  (including  the  mailing)  for  the  draft  to 
mature,  and  then  another  month,  and  even  more,  for  the  pro- 
ceeds to  reach  Germany;  remittance  is  generally  made  in  the 
shape  of  a  time  bill.  This  would  really  mean  a  very  long  term 
of  credit,  but  the  banks  prefer  not  to  buy  drafts  outright  where 
the  running  time  exceeds  three  or  four  months.  Then  again, 
here  it  is  difficult  to  calculate  the  actual  time  of  acceptance.  The 
buyer  also  frequently  arranges  for  an  extension  of  time  beyond 
that  originally  agreed  on.  Here,  also,  drafts  against  acceptance 
predominate,  and  the  buying  of  drafts  being  based  on  the  res- 
ponsibility of  drawers  is  naturally  limited  to  a  few  of  the  richest 
exporters.  These,  in  their  turn,  find  much  less  expensive  means 
for  financing  their  shipments  than  by  selling  drafts  to  oversea 
banks. 

In  the  ordinary  course  of  discounting  drafts  there  are  two 
elements  to  be  considered :  The  time  until  maturity  and  the  dis- 
count rate.  When  drafts  are  bought  on  South  America  the  total 
deductions  are  made  in  the  shape  of  a  certain  percentage  off  the 
face  value  of  the  draft,  so  that  it  must  be  drawn  with  the  two 
elements  taken  into  account.  It  also  must  contain  the  collection 
commission,  revenue-stamp  expenses,  and  other  small  expendi- 
tures, such  as  postage.  The  German  banks  quote  rates  on  the 
South  American  points  at  sight,  and  30  days,  60  days,  and  90 
days  after  sight.  The  longer  the  bank  is  out  of  its  money  the 
less  does  the  seller  of  the  draft  receive. 


DRAFT  DISCOUNT   I; Ail :s  319 

Drafts  drawn  on  places  where  the  buying  bank  has  branches 
of  its  own  fetch  better  prices  for  the  seller  of  the  draft.  Tnc 
price  is  reduced  in  the  case  of  drafts  on  places  where  there  are 
no  branches  of  the  bank  in  question,  as  the  profit  of  the  con- 
version of  the  draft  into  the  legal  tender  of  the  drawee's  domi- 
cile is  lost  to  another  bank. 

The  longer  the  time  lost  in  transit  the  less  is  the  purchase 
price  of  the  draft.  The  deductions  are  less  in  the  case  of  drafts 
on  the  east  coast  of  South  America  as  compared  with  the  west 
coast,  on  the  ports  as  compared  with  interior  points. 

Two  elements  enter  into  the  determination  of  the  discount 
of  these  drafts — the  interest  rate,  which  is  generally  6  per  cent, 
and  the  demand  and  supply  of  drafts  on  certain  points.  Drafts 
on  Central  and  South  America  are  generally  settled  for  at  des- 
tination by  three  months'  paper. 

It  is  in  business  with  India  and  the  Far  East  that  the  buy- 
ing of  drafts  by  German  banks  came  to  be  most  extensively  em- 
ployed. Here  the  interest  payable  by  the  customer  was  generally 
eliminated  from  the  face  value  of  the  draft,  which  somewhat 
facilitated  the  routine.  The  terms  of  settlement  were  much 
shorter  than  in  the  South  American  business.  The  rates  of  in- 
terest were  generally  determined  by  the  Hongkong  &  Shanghai 
Banking  Corporation  and  were  based  on  the  position  of  the 
London  money  market  as  well  as  on  the  financial  condition  of 
the  various  countries  in  the  Far  East  on  which  the  drafts  are 
drawn. 

Buying  rates  for  drafts  on  the  principal  points  in  Australia 
and  New  Zealand  were  singularly  free  from  fluctuations.  For  a 
good  many  )-ears  before  the  war  the  discount  was  1%  per  cent 
for  sight  drafts,  21/!  per  cent  for  30  days'  sight  drafts,  2%  per 
cent  for  60  days'  sight  drafts,  31/4  per  cent  for  90  days'  sight 
drafts.  These  figures  are  based  on  a  discount  of  6  per  cent  per 
annum,  about  i374  months  being  figured  for  transit  both  ways. 
One  of  the  reasons  of  the  extensive  buying  of  drafts  on  the 
British  colonies  is  to  be  found  in  the  reliable  character  and  the 
financial  solidity  of  the  business  houses  in  those  countries. 

Four   banks — the   Bank   of  Africa,   the   National    Bank  of 


320  INTERNATIONAL  COMMERCE 

South  Africa,  the  Standard  Bank  of  South  Africa,  and  the  Afri- 
can Banking  Corporation — fix  the  buying  rate  for  bills  on  South 
Africa.  The  principal  factor  determining  this  rate  is  the  London 
discount  rate.  When  the  bank  discount  rate  in  London  was  4 
per  cent  the  rate  for  sight  drafts  on  South  Africa  sold  in  Ger- 
many was  one-half  of  1  per  cent,  which,  figuring  on  two  months 
transit  both  ways,  is  on  the  basis  of  6  per  cent  per  annum.  An- 
other element  here  was  the  demand  and  the  supply  of  bills.  When 
the  export  of  native  products,  gold,  etc.,  from  South  Africa  was 
heavy,  and  remittances  had  to  be  made  to  South  Africans,  the 
seller  of  drafts  on  South  Africa  naturally  received  better  rates. 

In  the  buying  of  drafts  on  foreign  countries  the  German 
banks  differentiated  between  drafts  drawn  in  European  and  in 
oversea  currencies.  This  is  of  particular  importance  in  the 
Asiatic  business.  Here  are  two  groups  of  countries — India,  Japan, 
and  Straits  Settlements  on  the  one  hand,  and  China  and  Hong- 
kong on  the  other.  Drafts  on  the  first  set  of  countries  are  sub- 
ject to  small  fluctuations;  Japan  has  adopted  the  gold  standard, 
India'  in  1899  introduced  the  gold  guaranteed  currency,  and  in 
1904  the  Straits  Settlements  dollar  became  independent  of  the 
price  of  silver.  London  fixes  the  quotation  rates  for  merchan- 
dise drafts  on  Asiatic  currency  and  the  conversion  into  German 
money  was  effected  at  the  day's  rate  of  exchange.  The  German 
exporter  asked:  "What  is  the  cost  of  a  yen  in  European  cur- 
rencies ?"  The  Japanese  asked :  "How  much  European  currency 
can  I  get  for  a  yen?" 

Rates  on  drafts  on  China  were  dependent  upon  the  London 
price  for  bar  silver.  The  branches  of  London  banks  in  China 
determine  the  rate  at  which  they  buy  and  sell  on  the  receipt  of 
cable  information  regarding  the  price  of  bar  silver.  As  the  price 
of  bar  silver  rises,  the  value  of  the  various  taels  rises  in  accord- 
ance with  their  content  of  silver. 

It  was  the  practice  to  turn  over  many  drafts,  probably  most 
drafts  on  Central  and  South  America  to  German  banks  for  col- 
lection, and  the  bank's  refusal  to  grant  credit  could  be  due  to 
the  drawer's  lack  of  financial  standing,  and  thus  be  a  compulsory 
one.  On  the  other  hand,  the  drawer  might  have  enough  capital 
to  finance  his  own  shipments  or  he  might  procure  his  credit  from 


GERMAx  ACCEPTANCE  CREDIT  321 

other  and  more  favorable  sources.  It  was  a  rare  thing  for  Ger- 
man exporters  to  be  so  strong  financially  as  to  keep  credit  ac- 
commodations granted  by  them  to  their  oversea  customers  with- 
in the  limits  of  their  own  capital.  But  it  was  a  frequent  occur- 
rence for  them  to  obtain  credit  on  a  more  favorable  basis  than 
by  discounting  drafts  with  the  banks.  Almost  to  the  end  of  the 
nineteenth  century  London  merchant  bankers  financed  the  Ham- 
burg exporters  who  sold  overseas  on  open  account.  These  im- 
portant houses,  having  at  their  disposal  huge  funds,  often  main- 
taining branches  and  business  houses  of  their  own  in  many  over- 
sea markets,  were  at  one  time  the  principal  discounters,  buyers, 
and  sellers  of  international  drafts,  in  addition  to  carrying  on 
active  commerce.  Later  they  limited  themselves  purely  to  the 
financing  of  the  import  and  the  export  trade  of  oversea  coun- 
tries. 

In  the  course  of  the  30  or  35  years  before  the  war  the  increase 
of  German  exporters,  the  rise  of  German  foreign  banks  and  Ham- 
burg private  bankers  and  merchant  bankers,  but  most  of  all  the 
opening  of  London  branches  of  German  banks  admitting  German 
commerce  to  the  London  money  market,  brought  about  increased 
credit  facilities  to  the  German  exporter.  The  German  banks 
doing  a  foreign  business  were  but  to  a  slight  degree  givers  of 
personal  credit  to  German  exporters.  Their  activity  was  mostly 
limited  to  the  negotiations  of  documentarily  secured  transactions 
with  oversea  markets.  But  the  so-called  great  German  banks, 
which,  as  will  be  seen  later,  were  so  closely  allied  with  the  banks 
doing  a  foreign  business,  undertook  the  problem  of  granting 
personal  credit  to  exporters.  Some  individual  English  banks 
with  branches  in  Hamburg  added  this  feature  to  their  work  and 
also  granted  personal  credit  to  German  exporters. 

This  credit  was  available  in  two  forms,  as  current-account 
business  and  as  acceptance  credit.  The  acceptance  credit  played 
a  more  prominent  part  in  the  work  of  private  and  merchant 
bankers,  the  current-account  credit  in  the  activities  of  the  great 
German  banks.  In  the  former  business  the  exporter  was  allowed 
a  maximum  limit  of  overdraft  by  checks,  which  he  used  in  pay- 
ment of  his  liabilities  in  Germany  and  elsewhere.  The  difference 
in  interest  on  both  sides  of  the  ledger,  the  difference  in  the  rate 
paid  by  the  bank  for  money  and  charged  by  it  to  the  customer 


322  INTERNATIONAL  COMMERCE 

for  accommodation,  and  a  special  commission  for  this  accom- 
modation formed  the  basis  of  the  banker's  profit  in  this  class 
of  business.  The  exporter,  as  debtor  to  the  banker,  paid  in  the 
current-account  form  of  credit,  interest  at  the  rate  of  I  per  cent 
above  the  Reichsbank  rate,  with  a  minimum  of  5  per  cent,  in 
addition  to  a  commission  of  about  one-eighth  of  1  per  cent  for 
a  month  or  fraction  of  a  month,  while  as  creditor  he  was  credited 
with  interest  at  the  rate  of  1  to  2  per  cent  under  the  Reichsbank 
rate.  • 

The  German  creditor  received  on  the  debit  side  interest  at 
the  minimum  rate  of  4  per  cent.  The  credit  items  were  credited 
with  interest  at  about  2  per  cent  less  than  the  debit  items.  The 
account-current  commission  was  claimed  from  the  exceeding  side 
of  the  account  and  amounts  to  one-fourth  of  1  per  cent  per  an- 
num. 

The  exporter  may  not  always  utilize  the  maximum  amount 
of  credit  granted  him,  but  it  is  always  at  his  disposal.  This  de- 
mands a  tying  up  of  capital  on  the  part  of  the  bank,  for  which 
reason  merchant  and  private  bankers  pay  less  attention  to  the 
account-current  business  than  to  acceptance  credit.  In  accept- 
ance credit  transactions  the  banker  stamps  his  acceptance  on  the 
draft,  and  an  excellent  means  is  provided  for  the  financing 
of  exports  without  in  any  way  tying  up  the  banker's  money.  He 
lends  his  credit.  The  exporter  using  this  credit  obligates  him- 
self to  cover  the  amount  of  acceptance,  generally  three  days  be- 
fore maturity.  The  credit  standing  of  the  drawee  makes  the 
paper  readily  discountable  in  the  private  market.  The  judgment 
of  the  market  prevents  excesses  through  inflating  the  acceptance 
credit.  When  there  is  too  much  acceptance  paper  outstanding 
against  this  or  that  acceptor,  the  market  reacts.  And  the  granter 
of  the  credit  naturally  is  careful  not  to  do  anything  to  shake  the 
confidence  of  the  market  in  himself. 

Money  procured  through  acceptance  credit  cost  the  debtor, 
after  private  discounting,  a  commission  of  one-fourth  to  one- 
half  of  1  per  cent  for  three  months,  revenue  stamps,  and  broker- 
age. The  exact  amount  of  the  acceptance  commission  was  regu- 
lated by  the  desirability  of  the  acceptance  as  determined  by  the 
open  discount  market.  Accommodation  through  the  account- 
current  business  was  subject  to  the  official  discount  rate  and  af- 


GERMAN  BANK  PRACTICE  323 

fected  by  the  bank's  state  of  liquid  assets.  When  the  private 
discount  rate  was  exceptionally  low,  say  below  3  per  cent,  ac- 
ceptance credit  was  much  cheaper  for  the  exporter  than  the 
account-current  accommodation.  Otherwise  both  were  about 
equal. 

We  may  now  look  into  the  activities  of  German  banks  be- 
fore the  war  as  granters  of  credit  to  oversea  customers.  If  the 
latter  were  to  pay  cash  for  their  purchases  they  would  have  to 
place  funds  in  the  port  of  shipment  about  the  time  of  the  ship- 
ment of  the  goods.  This  was  generally  the  time  when  the  shipper 
paid  the  German  manufacturer.  Such  were  the  terms  very  fre- 
quently exacted  by  American  manufacturers  from  their  foreign 
customers.  But  the  shipper  is  not  the  only  man  who  runs  risk 
in  foreign  transactions.  The  goods  may  not  correspond  with 
the  order.  They  are  seldom  unpacked  and  examined  in  the  ports. 
Delivery  is  made  abroad.  Cash  in  this  instance  is  paid  against 
documents.  The  invoice  is  turned  over  to  some  agent  of  the 
buyer.  Payment  is  made  by  a  bank  out  of  funds  to  the  credit 
of  the  foreign  buyer.  Occasionally  the  bank  grants  credit  to  the 
foreign  importer.  The  latter  pays  the  bank  by  means  of  drafts 
or  checks.  Or  the  bank  accepts  drafts  drawn  on  the  foreign 
customer.  The  granter  of  credit  here  is  the  bank,  the  recipient 
generally  a  European  house  overseas.  The  credit  may  be  limited 
to  some  one  particular  shipment,  the  bank  promising  to  honor 
the  draft  of  the  shipper.  The  accommodation  is  generally  lim- 
ited to  some  maximum  amount.  This  relation  is  subject  to  im- 
mediate notice  of  cancellation  on  the  part  of  the  bank.  This  is 
frequently  done  in  cases  where  the  oversea  importer  wishes  to 
use  the  service  of  an  exporter  whose  paper  the  bank  would  not 
readily  honor. 

Or  the  exporter  may  demand  a  letter  of  credit  from  the 
oversea  customer.  Through  its  acceptance  of  drafts  the  bank 
becomes  the  debtor  of  the  exporter.  The  advantage  to  the  lat- 
ter is  that  there  is  no  recourse  clause  to  the  transaction.  This 
class  of  credit  to  the  oversea  importer  is  cultivated  by  English 
and  French  bankers,  as  well  as  by  some  Hamburg,  Bremen,  and 
other  German  merchant  bankers.  The  great  German  banks  and 
oversea  banks  did  not  customarily  enter  into  this  class  of  busi- 
ness.   This  class  of  credit  is  personal  to  the  oversea  buyer  and 


324  INTERNATIONAL.  COMMERCE 

is  only  to  some  extent  covered  by  the  shipment,  unless  it  is  sec- 
ured to  the  banker  by  a  letter  of  lien.  The  bank  may  maintain 
with  its  foreign  client  an  account-current  business,  or  may  be 
paid  from  case  to  case  by  means  of  drafts  which  are  disposed 
of  in  the  market.  The  exporter  does  not  bother  about  the  credit 
standing  of  his  customer,  and  particularly  the  manufacturers 
exporting  direct  and  maintaining  no  special  oversea  organization 
make  use  of  this  method  of  financing  foreign  shipments. 

Another  form  of  financing  foreign  shipments  which  was 
usual  in  Germany  is  the  del  credere  business.  The  bank  under- 
takes a  guarantee  for  the  discharge  of  the  buyer's  obligation. 
But  the  capital  of  the  exporter  is  tied  up  in  the  shipment.  This 
was  customary,  for  instance,  in  dealing  with  Siberia.  Siberian 
banks  undertaking  the  guarantee,  on  account  of  a  thorough  in- 
sight into  the  debtor's  condition.  These  banks  seldom  entered  into 
direct  relations  with  German  exporters,  but  mostly  with  Ham- 
burg banks,  who  charged  a  commission  of  one- fourth  to  one- 
eighth  of  i  per  cent.  The  foreign  bank  had  special  arrangements 
with  the  buyer. 

In  the  preceding  paragraphs  we  have  traced  the  history  of 
German  efforts  to  extend  their  relations  with  oversea  markets. 
We  have  purposely  refrained  from  entering  into  a  discussion  of 
their  methods  in  penetrating  into  European  countries  where  the 
proximity  of  the  markets,  easy  railway  connections,  and  years 
of  direct  commercial  intercourse,  unhindered  by  such  restrictions 
as  prevailed  at  one  time  in  the  colonies,  have  contributed  to  deal- 
ings independent  of  foreign  mediation,  roughly  analogous  to  in- 
tercourse between  the  United  States  and  Canada,  if  we  overlook 
the  difference  in  languages,  which  to  the  careful  and  thorough 
German,  ever  ready  to  learn  foreign  languages  and  customs, 
presented  no  obstacles. 

We  then  undertook  to  study  in  detail  the  routine  and  the 
nature  of  various  instruments  of  credit  which  have  evolved  from 
the  desire  of  the  buyer  oversea  to  postpone  his  payments  and  the 
wish  of  the  producers  in  Germany  to  receive  promptly  the  funds 
due  them.  We  have  noted  in  passing  the  fact  that  the  universal 
demand  for  credit  in  the  oversea  markets  and  the  economic  in- 
ability of  the  German  manufacturers  to  do  justice  to  it,  placed 


GERMAN  BANKS  325 

the  bulk  of  the  export  trade  of  Germany  with  the  oversea  mar- 
kets in  the  hands  of  export  houses. 

3.    German  Banks  and  the  Financing  of  Foreign  Shipments. 

The  aim  of  the  German  banking  system  with  regard  to  for- 
eign expansion  was  to  assist  the  German  export  merchant  in 
every  way  by  facilitating  export  and  providing  food  and  em- 
ployment for  the  domestic  population,  to  develop  the  German 
colonies,  to  further  German  cable  connections,  to  compete  for  a 
share  in  foreign  loans,  to  found  industrial  enterprises  abroad,  to 
start  and  promote  international  commercial  relations,  to  streng- 
then German  influence  in  foreign  countries,  to  assist  German 
shipping,  to  found  banks  in  foreign  countries,  and  last,  but  not 
least,  to  pursue  a  careful  financial  policy  for  the  purpose  of  a 
financial  preparedness  in  the  case  of  war. 

The  Deutsche  Bank,  founded  in  1870,  was  the  pioneer  in  this 
campaign  of  foreign  expansion.  In  the  status  of  this  great  bank 
the  following  outline  of  its  export  program  is  found : 

"The  object  of  the  company  is  to  carry  on  banking  business 
of  all  kinds,  particularly  in  the  furtherance  and  facilitation  of 
commercial  relations  between  Germany,  the  other  European 
countries,  and  with  oversea  markets." 

Until  the  Deutsche  Bank  entered  the  field  the  German  export 
trade  depended  absolutely  on  English  mediation  in  the  financing 
of  foreign  shipments.  German  acceptances,  especially  in  view 
of  the  monetary  conditions  in  Germany  (absence  of  a  uniform 
currency  and  of  the  gold  standard),  were  discounted  at  an  un- 
favorable rate  as  compared  with  the  sterling  bills. 

The  Deutsche  Bank  undertook  to  establish  a  credit  footing 
in  London,  first  by  representation,  then  by  participating  in  the 
foundation  of  the  German  Bank  of  London.  The  idea  was  to 
provide  a  buying  place  in  London  for  German  bills.  In  the  ex- 
tension of  this  idea  the  Deutsche  Bank  established  agencies  in 
Yokohama  and  Shanghai  (1872).  The  German  exporter  could 
then  figure  his  drafts  in  marks  and  the  man  in  the  Far  East  could 
pay  the  amount  of  the  invoice  in  the  same  currency.  The  lack 
of  the  gold  standard  in  Germany  reacted  unfavorably  on  the 
business  of  these  agencies,  and  they  were  given  up  in  1874.  Such 


326  INTEENATIONAL  COMMEKCE 

was  also  the  fate  of  the  La  Plata  ( Argentine )  Bank  founded  by 
the  Disconto-Gesellschaft  and  taken  over  by  the  Deutsche  Bank 
in  1874. 

In  1 87 1  the  Deutsche  Bank  had  branches  in  Hamburg  and 
Bremen,  an  office  in  New  York,  in  1873  an  agency  in  London. 
The  efforts  of  the  Deutsche  Bank  in  branching  out  abroad  were 
severely  criticized  in  Germany.  These  efforts,  however,  finally 
freed  Germany  to  a  large  extent  of  foreign  mediation  in  the 
negotiation  of  drafts  on  foreign  countries. 

The  Deutsche  Bank  did  great  work  for  the  German  trade 
by  its  efforts  to  secure  to  the  mark  a  position  or  respect  in  in- 
ternational trade.  A  history  of  the  gradual  growth  of  this  bank's 
connections  is  exceedingly  instructive. 

In  1886  the  Deutsche  Bank  formed  the  Deutsche  Uebersee- 
ische  Bank  (German  Oversea  Bank),  which  became  better  known 
to  Americans  by  its  Spanish  name  Banco  Aleman  Transatlantico. 
The  original  capital  of  the  latter  was  10,000,000  marks ;  the  aim 
of  the  bank  was  to  cultivate  South  American  business,  more 
particularly  the  Argentine  business.  It  was  reorganized  in  1893 
with  a  capital  of  20,000,000  marks,  and  the  latter  was  increased 
in  1908  to  30,000,000  marks.  This  "daughter"  bank  has  always 
paid  good  dividends,  the  annual  rate  from  1893  to  191 1  being 
as  follows :  6,  7,  9,  9,  8,  8,  8,  8,  8,  8,  8,  8,  8,  9,  9,  9,  9,  9,  9  pet- 
cent. 

It  has  23  branches — 7  in  Chile  (Santiago,  Antofagasta,  Con- 
cepcion,  Iquique,  Temuco,  Valdivia,  Osorno)  ;  5  in  Argentina 
(Buenos  Aires,  Bahia  Blanca,  Cordoba,  Mendoza,  Tucuman)  ; 
4  in  Peru  (Lima,  Callao,  Trujillo,  Arequipa).  1  in  Montevideo, 
Uruguay;  2  in  Spain  (Barcelona  and  Madrid);  1  in  Rio  de 
Janeiro,  Brazil. 

The  Deutsche  Bank  was  part  owner  of  the  Mexikanische  Bank 
fur  Handel  und  Industrie  in  Mexico  City.  In  1889  it  financed, 
in  company  with  other  German  banks,  the  Anatolian  Railway  in 
Turkey,  with  headquarters  at  Constantinople,  Turkey.  In  the 
same  year  it  participated  in  the  launching  of  other  important 
railway  enterprises  in  the  Turkish  Empire.  It  also  financed  a 
number  of  State  and  railway  issues  in  the  United  States. 

Again,  in  1889,  it  participated  in  the  creation  of  the  very 
important  Deutsch-Asiatische  Bank   (engaged  in  the  Far  East 


GERMAN  BANK  AFFILIATIONS  327 

trade)  ;  in  1903  it  took  part  with  other  banks  in  launching  the 
Bagdad  Railway  to  the  Persian  Gulf.  Many  railway  and  indus- 
trial companies  were  floated  in  East  Africa,  Central  America,  and 
other  countries  by  or  with  the  aid  of  the  Deutsche  Bank.  It  had 
a  capital  of  200,000,000  marks  in  191 4. 

The  next  prominent  of  the  so-called  "great  banks"  of  Ger- 
many in  furthering  foreign  trade  was  the  Disconto-Gesellschaft. 
It  founded  the  La  Plata  Bank  in  Argentina,  which  was  later  li- 
quidated; in  1880  a  company  for  plantations  in  the  South  Sea 
Islands;  in  1887  the  Brasilianische  Bank  fur  Deutschland,  with 
headquarters  in  Hamburg  and  five  branches  in  Brazil  (Rio  de 
Janeiro,  Sao  Paulo,  Santos,  Porto  Alegre,  and  Bahia).  It  had 
an  interest  in  the  Deutsch-Asiatische  Bank,  above  referred  to.  in 
the  bank  of  Ernesto  Tornquist  in  Buenos  Aires,  in  a  bank  in 
Belgium,  another  in  Italy.  In  1895  it  founded  a  bank  in  Chile 
(Banco  de  Chile  y  Alemania),  with  headquarters  in  Hamburg 
and  branches  in  Chile  and  a  capital  of  10,000,000  marks. 

The  Dresdner  Bank  was  actively  interested  as  founder  in 
whole  or  in  part  of  banks  in  Roumania  and  Bulgaria,  for  East 
Africa,  for  West  Africa,  and  in  a  number  of  foreign  railway  en- 
terprises, particularly  the  Great  Venezuelan  Railway.  It  was 
in  close  touch  with  J.  P.  Morgan  &  Co.,  of  New  York.  In  com- 
pany with  other  banks  it  founded  the  great  Deutsche  Orient  Bank 
for  the  trade  with  Egypt,  Turkey,  Greece,  and  Morocco.  In 
1905  it  helped  create  the  German-South  American  Bank,  which 
had  branches  in  Hamburg,  Chile,  Argentine,  Brazil,  and  Mexico. 

The  other  great  banks  of  Germany  interested  in  foreign 
trade  were  the  Berliner  Handelsgesellschaft,  A.  Schaaffhausen'- 
scher  Bank-Verein,  Darmstaedter  Bank  (Bank  fiir  Handel  und 
Industrie,),  and  the  National  Bank  fiir  Deutschland. 

In  1889,  under  the  joint  auspices  of  the  above-named  banks, 
was  founded  the  Deutsch-Asiatische  Bank  at  Shanghai,  wh'»ch 
had  13  branches  in  Berlin  and  Hamburg;  Tientsin,  Tsingtau, 
Hankow,  Hongkong,  Tsinanfu,  Peking,  and  Canton,  China; 
Yokohama  and  Kobe,  Japan;  Singapore,  Straits  Settlements, 
and  Calcutta,  India.  Space  forbids  to  mention  in  detail  all  of 
the  varied  foreign  enterprises  in  which  these  banks  were  inter- 
ested wholly  or  in  part. 

Within  the  scope  of  the  present  study  the  German  banks 


328  INTERNATIONAL  COMMERCE 

interest  us  only  to  the  extent  of  their  mediation  in  facilitating  the 
financing  of  foreign  shipments.  A  general  review  of  the  Ger- 
man banking  system  with  its  advantages  and  weaknesses  has  been 
given  in  various  publications  of  the  National  Monetary  Commis- 
sion, but  our  brief  survey  would  be  incomplete  without  some 
reference  to  the  Reichsbank,  the  great  central  bank  of  Germany, 
which  was  founded  in  1875,  and  is  a  private  bank,  with  private 
means,  standing  under  the  control  of  the  State.  It  is  a  stock 
company,  and  in  the  eyes  of  the  German  law  a  juridical  person, 
having  for  its  object  to  regulate  the  entire  money  intercourse 
of  the  Empire,  to  facilitate  settlements,  and  to  provide  for  the 
utilization  of  available  capitals.  The  capital  of  the  Reichsbank 
is  180,000,000  marks,  and  on  December  31,  1910,  it  had  reserve 
funds  amounting  to  64,813,723.75  marks.  The  head  of  the 
Reichsbank  is  the  German  Chancellor,  and  he  is  assisted  by 
directors  who  are  appointed  for  life.  There  is  an  administra- 
tion board  consisting  of  the  Chancellor  and  four  members.  The 
Reichsbank  maintains  500  branches,  and  has  the  right  to  issue 
bank  notes  in  Germany.  The  Reichsbank  dictates  the  dis- 
count rate  and  the  rate  for  loans,  which  are  authoritative  for  all 
Germany  and  have  been  referred  to  frequently  in  speaking  of 
rates  in  connection  with  drafts  drawn  in  Germany  on  foreign 
countries  and  in  foreign  countries  on  Germany.  The  great  banks 
of  Germany  are  in  constant  intercourse  with  the  Reichsbank, 
being  so-called  "giro"  customers,  which  means  that  in  place  of 
making  cash  payments  to  one  another  they  can  use  the  Reichs- 
bank as  a  clearing  house. 

4.     The  Advantages  and  the  Defects  of  the  German  Methods 
of  Financing  Foreign  Shipments. 

Without  referring  again  to  the  technique  of  the  service  ren- 
dered by  the  German  banks  to  the  German  export  trade,  we  may 
summarize  the  advantages  and  the  disadvantages  of  the  German 
credit  methods  in  the  export  trade  and  fasten  in  our  mind  cer- 
tain points  in  connection  therewith,  as  far  as  they  relate  to  pre- 
war conditions. 

1.  The  German  manufacturer,  as  a  rule,  was  not  in  a  posi- 
tion to  grant  credit  to  customers  in  foreign  countries,  and  was 


GERMAN  METHODS:  SUMMARY  »2d 

hardly  a  factor  in  the  export  trade  at  all.  The  German  export 
trade  was  largely  in  the  hands  of  German  export  merchant*. 
Very  little  direct  dealing  between  German  manufacturers  and 
oversea  customers  was  done. 

2.  The  German  manufacturers,  however,  showed  a  tendency 
to  emancipate  themselves  from  the  mediation  of  the  export  mer- 
chants. Where  long-term  credits  were  a  vital  necessity  the  Ger- 
man manufacturers  could  not  do  business  direct  except  as  they 
were  in  special  cases  aided  by  banks. 

3.  The  remarkable  extent  to  which  German  industries  were 
carried  on  by  the  use  of  credit  was  largely  based  on  the  partici- 
pation of  the  great  banks  in  a  very  great  number  of  industrial 
enterprises.  German  banks  were  represented  on  the  boards  of 
directors  in  numerous  undertakings  of  the  most  varied  character 
throughout  the  Empire,  giving  them  special  support  in  their 
credit  transactions. 

4.  The  system  of  bank  acceptances  described  in  the  preced- 
ing pages  provided  readily  available  credit  facilities  for  the 
domestic  industries,  the  import  and  the  export  trade.  Thus  the 
German  manufacturers  and  exporters  made  use  of  long-term 
credits  mostly  by  three  months'  drafts  (renewable  as  need  be) 
on  banks  with  which  they  were  in  connection ;  these  drafts  were 
readily  convertible  into  cash  on  the  basis  of  discount  rates  fixed 
by  the  market,  and  they  were  thus  in  a  position  to  grant  credit 
themselves.  Similar  acceptances  were  also  the  subject  of  ex- 
tensive official  trading  in  London,  whereas  the  notes  of  American 
manufacturers  and  other  business  firms  until  the  organization 
of  the  Federal  Reserve  Bank  system,  and  the  liberal  legislation 
and  rulings  with  regard  to  bank  acceptances  concurrent  with 
and  subsequent  to  the  establishment  of  the  Federal  Reserve  Bank 
system  were  dealt  in  on  a  far  more  limited  scale.  The  American 
holder  of  notes  was  at  a  great  handicap,  but  a  notable  improve- 
ment has  been  brought  up  about  in  recent  years,  which  will  be 
reviewed  in  detail  in  the  consideration  of  the  present  day  facili- 
ties of  American  banks. 

5.  The  sphere  of  activity  of  the  German  banks  was  much 
more  extensive  than  that  of  either  the  American  or  the  English 
banks,  and  they  assisted  their  clients  not  only  by  granting  credit, 
but  also  by  discounting  their  long  bills,  granting  loans  and  ad- 


330  INTEKNATIONAL  COMMERCE 

vances  on  raw  material,  shipments  of  manufactured  goods,  etc., 
opening  or  confirming  commercial  credits  as  required,  guarantee- 
ing prompt  fulfilment  of  contracts,  etc. 

6.  The  German  banks  maintaining  branches  and  connections 
overseas  played  an  important  part  in  the  furtherance  of  the  Ger- 
man export  trade  by  enabling  foreign  customers  to  provide  for 
the  financing  of  their  shipments  from  Germany  and  by  the  moral 
force  of  being  on  the  spot  and  in  close  touch  with  the  local  trade 
conditions.  At  the  same  time  they  were  in  intimate  touch  through 
agencies  and  connections  with  London  as  the  center  of  the  inter- 
national credit  transactions.  Yet  these  banks  were  not  created 
originally  so  much  as  a  means  for  better  credit  facilities  over- 
seas as  with  the  object  of  participating  in  the  financial  activities 
of  the  countries  within  their  territory. 

7.  The  participation  of  German  banks  in  the  development 
of  many  foreign  industrial,  railway,  and  mining  enterprises  pro- 
vided outlets  for  German  exports. 

8.  The  establishment  of  a  network  of  German  banks  over- 
seas saved  to  Germany  a  considerable  portion  of  the  tribute  for- 
merly paid  to  England  in  the  negotiation  of  foreign  bills. 

9.  London,  however,  up  to  the  beginning  of  the  World  War 
was  still  the  leading  center  of  financial  exchange,  and  in  dealing 
with  British  dominions  Germany  still  had  to  look  to  London  for 
mediation.  German  banks  were  compelled  to  maintain  banking 
connections  and  branches  in  that  all-important  center.  Since 
the  stirring  events  which  ended  with  the  signing  of  the  Peace 
between  the  Allied  and  the  Associated  Powers  on  the  one  hand 
and  the  Teutonic  Alliance  on  the  other,  New  York  came  to  the 
fore  as  the  center  of  financial  operations  of  international  char- 
acter. How  the  relative  positions  of  London  and  New  York  will 
work  out  eventually,  it  is  too  early  to  say.  But  London  has  lost 
the  undisputed  supremacy  and  will  henceforth  divide  honors 
with  New  York,  if  not  yield  them  up  entirely. 

10.  In  certain  countries,  such  as  Russia,  Germans  had  no 
banks  or  branches  of  their  own,  while  their  competitors  had  such 
branches.  Nevertheless  through  a  system  of  alliances  and  secret 
agreements  they  succeeded  in  dominating  such  domestic  banks 
as  existed  in  those  countries  to  a  considerable  extent.  In  Rus- 
sia, taking  that  country  again  for  an  example,  it  was  positively 


GEBMAN  METHODS:  SUMMARY  :c;i 

known  even  after  the  declaration  of  the  War  what  Russian  hanks 
were  under  the  dominating  influence  of  this  or  that  group  of 
German  bankers.  In  a  way  this  illustrates  the  contention  be- 
tween those  groups  of  banking  interests  in  the  United  States 
which  advocate  and  those  which  deer"  \hz  establishment  of 
branch  banks  abroad.  Without  branch  banks  it  is  necessary  to 
secure  communities  of  interest  and  working  agreements  with 
existing  oversea  banks,  in  order  to  be  able  to  serve  the  interests 
of  the  exporting  country.  The  establishment  of  branch  banks 
abroad,  though  of  great  help  under  certain  circumstances,  is  not 
the  sole  solution  of  the  credit  problem. 

11.  Even  before  the  war  voices  were  heard  in  Germany 
against  undue  extension  of  long-term  credits  at  home  and  abroad. 
Jn  times  of  financial  stringency,  such  as  prevailed  in  Germany 
during  the  Morocco  controversy  with  France,  the  results  of 
looseness  in  credit  dealings  were  plainly  observable.  It  was  rec- 
ognized that  a  certain  element  of  peril  was  the  inevitable  con- 
comitant of  German  liberality  in  the  extension  of  credits.  An 
enormous  burden  had  been  put  upon  the  financial  resources  of 
Germany  through  the  justly  severe  peace  conditions  imposed 
upon  her.  It  seems  unthinkable  that  she  will  in  the  near  future 
enter  the  markets  of  the  world  with  anywhere  near  the  same 
ability  to  cater  to  the  requirements  of  export  markets  for  long 
term  credits.  The  immediate  result  must  be  that  all  over  the 
world  a  rigorous  scrutiny  will  be  applied  to  all  demands  for 
credit.  Where  credit  of  unusual  length  is  an  absolute  necessity 
special  instrumentalities  will  be  formed  to  take  care  of  it.  That 
it  will  not  be  the  province  of  the  manufacturers  of  any  country 
to  concern  themselves  with  that  phase  of  the  financial  situation 
is  clear.  As  far  as  United  States  as  an  exporting  countiy  is 
concerned,  the  creation  of  a  new  order  of  exporters — the  so- 
called  world  merchants — with  financial  resources  far  beyond  the 
dreams  of  the  pioneer  exporters,  and  with  financial  alliances  in- 
suring the  success  of  their  operations,  seems  to  point  to  the 
solution  of  the  problem.  American  banks,  taking  up  the  study 
of  foreign  markets  from  the  point  of  view  of  the  American 
manufacturer  and  from  the  point  of  view  of  investor,  are  like- 
wise headed  in  that  direction.  Co-operation  under  the  Webb  law 
and  under  the  proposed  Edge  bill  may  add  the  final  link  in  the 


332  INTEKNATIONAL  COMMERCE 

chain  of  American  efforts  to  meet  a  situation  in  international 
commerce  in  which  suddenly  a  leading  role  has  been  thrust  upon 
the  United  States. 

12.  Finally,  returning  to  the  credit  problem  as  far  as  the 
manufacturer  is  ccncerned,  we  may  contrast  the  English  attitude 
to  credit  with  the  German.  The  English  exporter  in  dubious 
cases  was  perfectly  willing  to  lose  an  occasional  order  to  the 
German  export  trade  rather  than  engage  in  a  ruinous  competi- 
tion by  lowering  credit  standards.  The  English  exporters  felt 
credit  to  be  the  poorest  sort  of  a  selling  argument,  being  most 
likely  to  appeal  to  the  least  desirable  class  of  trade.  German 
manufacturers,  in  their  efforts  to  go  around  the  exporter,  fre- 
quently over-extended  credits  and  met  with  disastrous  experi- 
ences. 

It  was  the  export  merchants  of  Germany,  backed  by  banks 
and  by  their  own  wonderful  organization,  who  were  grantors  of 
long  term  credits,  but  never  to  customers  who  were  weak  finan- 
cially, never  without  close  watch  on  the  spot  over  developments, 
never  without  security  such  as  return  shipments  of  oversea  pro- 
duce. 

In  the  perplexing  complications  which  the  credit  problem 
must  assume  as  the  result  of  the — at  least  temporary — elimina- 
tion of  the  German  factor,  of  the  accession  of  additional  classes 
of  credit  seekers  in  the  new  commonwealths  recently  created 
and  in  the  countries  undergoing  the  painful  tasks  of  reconstruc- 
tion, and  finally  of  the  new  alignment  of  creditor  and  debtor  na- 
tions,— the  American  business  world  must  bear  certain  view- 
points clearly  before  it.  It  can  most  benefit  self  and  the  world 
in  supplying  the  needs  of  the  world  if  it  meets  the  problem  be- 
fore it  strictly  on  the  basis  of  the  fullest  co-operation  and  co- 
ordination of  American  resources.  There  must  be  a  division  of 
labor.  The  manufacturer  must  not  seek  to  assume  the  burden 
of  financing  the  world's  need  of  manufactured  goods.  He  will 
content  himself  by  modestly  accommodating  those  financially 
most  solvent  customers  whose  paper  his  bank  will  discount  for 
him.  Even  in  so  doing  he  will  remember  that  the  actual  finan- 
cing is  done  by  the  bank.  An  inevitable  elimination  of  many  of 
the  mushroom  enterprises  born  of  the  World  War  upheaval, 
will  be  found  necessary.     The  old-time  export  merchant  will 


GERMAN  METHODS:  SUMMARY  333 

find  renewed  and  enlarged  opportunities  for  his  services.  The 
banks  and  financial  institutions  by  adopting  a  wise  policy  and 
by  a  close  study  of  conditions  in  the  various  markets  can  do 
much  to  promote  American  trade.  The  new  order  of  world  mer- 
chants can  do  pioneer  work  in  undertaking  a  broad-spirited  cam- 
paign in  all  markets  of  the  world.  The  Government,  through 
the  Federal  Reserve  System,  through  the  United  States  Shipping 
Board  and  through  the  Department  of  Commerce  can  establish 
those  bases  of  success  which  are  necessary  to  support  the  efforts 
of  manufacturers,  banks  and  exporters. 


334  INTEENATIONAL  COMMEBCE 


B.    The  British  Methods  of  Financing  Foreign 
Shipments. 

Before  the  war  London  was  the  undisputed  center  of  inter- 
national payments.  The  experience  of  the  United  States  in  1914 
illustrates  this  point  very  strikingly. 

United  States  imported  in  19 14,  among  other  commodities, 
hides  and  skins,  rubber,  coffee  and  wool  to  the  amount  of  over 
four  hundred  million  dollars.  Practically  all  of  such  importa- 
tions until  1 914  were  passed  through  London  and  paid  for  in 
the  form  of  sterling  credits,  the  drafts  being  drawn  in  sterling 
currency  on  London. 

The  cause  of  London's  predominant  position  in  the  field  of 
international  financing  is  to  be  seen  in  the  position  of  England 
as  the  chief  commercial  carrier  all  through  the  early  stages  of 
the  development  of  European  dealings  with  oversea  countries, 
for  which  reason  it  became  the  center  of  international  settle- 
ments. 

The  cataclysm  of  the  world  war  worked  a  remarkable 
change  in  this  condition.  America  became  the  predominant  credit 
nation  of  the  world.  New  York  became  the  center  of  credits. 
We  are  as  yet  in  the  midst  of  the  organic  readjustments  that 
must  necessarily  follow  from  so  remarkable  a  shift  in  the  equi- 
librium of  the  international  financial  mechanism.  In  proper 
place  we  will  take  up  the  consideration  of  the  novel  aspects  of 
the  credit  problem — both  in  the  narrow  meaning  of  the  term,  as 
applied  to  individual  dealings  between  an  American  manufac- 
turer and  his  foreign  customer,  and  in  the  broader  meaning  of 
the  term,  as  relating  to  the  general  credit  need  abroad  and  to  the 
position  of  America  as  a  credit  nation  and  the  paramount  holder 
of  and  investor  in  foreign  securities.  At  this  point  we  are  merely 
concerned  with  the  development  of  the  British  methods  of  finan- 
cing foreign  shipments  as  prevalent  before  the  war  and  as  af- 
fected by  the  reduced  importance  of  London  as  the  center  of 
international  financial  transactions. 


LONDON'S  PREDOMINANCE  335 

What  was  the  effect  of  London's  paramount  importance  in 
international  settlements?  The  merchants  overseas  always  pre- 
ferred to  make  and  to  receive  their  payments  on  the  basis  of  the 
sterling  currency,  until  it  assumed  the  character  of  an  in- 
ternational medium  of  exchange.  European  exporters  found  it 
convenient  to  receive  their  payments  in  one  currency  rather  than 
in  the  miscellaneous  currencies  of  the  different  oversea  markets. 
It  was  a  convenience  to  have  such  a  center ;  here  the  foreign 
importer  could  remit  his  payments  and  here  also  the  European 
exporter  could  receive  his  money,  and  the  miscellaneous  buyers 
in  foreign  countries  drawing  their  supplies  from  several  European 
centers  were  content  to  concentrate  their  settlement  in  one  place. 
London  became  not  only  a  clearing  house  for  international  settle- 
ments but  also  a  central  place  of  deposit  for  bankers  and  mer- 
chants all  over  the  world. 

This  created  an  immense  revenue  for  England.  The  national 
wealth  of  that  coutnry  was  enriched  year  after  year  by  the 
tribute  paid  it  in  connection  with  international  exchange  trans- 
actions. On  the  other  hand  the  English  exporter  had  the  ad- 
vantage of  dealing  with  foreign  buyers  in  his  own  domestic  cur- 
rency, saving  loss  of  exchange  and  other  expenses.  The  concen- 
tration of  foreign  trade  banks  in  London,  with  their  vast  accu- 
mulations of  information  regarding  the  foreign  customers,  was 
another  important  advantage.  Other  nations  have  emancipated 
themselves  to  a  considerable  degree  from  the  English  predomi- 
nance in  the  ocean  carrying  trade,  but  the  attempts  to  go  around 
London  as  a  center  of  financial  intercourse  with  the  export  mar- 
kets have  been  less  successful.  It  requires  a  plentiful  sprink- 
ling of  merchants  of  one  nationality  in  foreign  markets  to  achieve 
any  success  along  these  lines.  This  is  the  explanation  of  that 
limited  measure  of  success  which  the  Germans  achieved  in  estab- 
lishing a  standing  for  their  currency  abroad  and  a  modicum  or 
direct  financial  intercourse.  Yet  the  German  exporters  and  im- 
porters immediately  before  the  war  still  largely  relied  on  London 
in  their  oversea  settlements.  And  the  English  banks  did  their 
utmost  to  discourage  the  formation  of  foreign  trade  banks  by 
other  nations. 

A  detailed  description  of  the  German  methods  of  financing 
foreign  shipments  through  banks  devoted  to  foreign  trade  has 


336  INTEENATIONAL  COMMERCE 

been  given.  These  methods  were  largely  adapted  from  the  English. 
England  at  the  beginning  of  the  World  War  was  still  the  classic 
head  of  international  banking  and  it  developed  the  standard  form 
of  dealing  with  the  financing  of  shipments  to  and  from  oversea 
markets. 

The  English  banks  engaged  in  foreign  banking  have  carried 
out  a  most  business-like  division  of  foreign  markets.  This  divi- 
sion of  territory  is  based  on  the  wide  variations  in  commercial 
usages  and  conditions  prevailing  therein.  East  and  West  are 
sharply  differentiated,  and  English  dominions  with  a  white  com- 
mercial population  are  catered  to  by  special  banks.  Within  these 
three  great  divisions  there  is  a  further  specialization  by  coun- 
tries.   Almost  all  of  these  banks  have  headquarters  in  London. 

The  English  foreign  trade  banks  maintain  branches,  agen- 
cies, and  correspondents  (the  latter  generally  import  and  export 
houses  with  banking  facilities)  throughout  the  sphere  of  their 
activity.  The  last-named  class  of  concerns  is  mostly  found  in 
small  Central  and  South  American  cities,  where  the  cost  of  estab- 
lishing special  branches  and  agencies  would  not  be  commensurate 
with  the  business  expected.  Some  of  these  correspondents  are 
in  independent  intercourse  with  banks  outside  of  England.  Many 
of  the  banks  catering  to  foreign  trade  have  agencies  in  other 
exporting  countries  doing  business  with  their  particular  field; 
for  instance,  the  London  &  Brazilian  Bank  has  agencies  in  New 
York,  Paris,  Lisbon,  and  elsewhere. 

The  English  export  merchants  are  in  touch  with  special 
banks  for  each  of  their  export  territories.  An  export  merchant 
doing  business  with  South  Africa,  Australia,  and  China  will  often 
be  in  connection  with  a  separate  bank  for  each  of  these  mar- 
kets. Non-English  merchants  of  prominent  financial  standing 
are  in  a  position  to  use  these  banks  for  the  financing  of  their 
business,  but  smaller  firms  can  utilize  their  services  only  for  the 
collection  of  drafts  or  for  business  with  full  security,  while  for 
other  accommodations  in  connection  with  exports  they  must  rely 
on  their  own  domestic  banks,  who,  in  their  turn,  may  fall  back 
on  the  English  banks. 

The  bulk  of  payments  through  London  foreign  banks  is  on 
the  basis  of  documentary  bills  or  drafts.    These  are  drafts  ac- 


ENGLISH  DRAFT  ROUTINE  337 

companied  by  bills  of  lading  (full  sets),  invoice  copy,  and  in- 
surance certificates. 

In  case  of  shipments  from  oversea  places  to  London  it  is 
customary  to  send  single  bills  of  lading  attached  to  first,  second, 
and  third  of  exchange  and  to  mail  them  by  various  steamers, 
the  bank  oversea  certifying  that  it  had  received  a  full  set  and  at- 
tached same  to  various  copies  of  drafts.  This  certificate  reads 
something  like  this:  "All  negotiable  vias  of  the  bill  of  lading 
relating  to  this  bill  have  been  received  by  the  London  &  Brazilian 
Bank,  Rio  de  Janeiro,  and  will  be  forwarded  to  the  London  & 
Brazilian  Bank,  London,  by  following  mails."  The  bills  of  lad- 
ing are  generally  drawn  in  blank,  or  sometimes  to  the  order  of 
the  bank,  and  only  seldom  direct  to  the  name  of  the  consignee. 
The  latter  is  the  case  when  the  consignee  is  of  the  highest  finan- 
cial standing  and  enjoys  special  credit  with  the  bank.  In  ship- 
ments from  oversea  the  original  insurance  policy  is  attached, 
unless  covered  by  "floating"  policies,  in  outward  shipments  gen- 
erally a  certificate  by  the  insurer.  This  document  is  also  drawn 
in  blank  or  to  the  name  of  the  holder. 

In  distinction  from  these  "documentary"  bills  forming  the 
bulk  of  drafts  handled  by  English  banks,  there  are  also  so-called 
"clean  bills,"  unaccompanied  by  such  documents. 

The  drafts,  as  explained  in  a  previous  chapter,  are  drawn 
either  against  payment  (d/p)  or  against  acceptance  (d/a).  In 
the  case  of  "documents  against  payment"  it  frequently  happens 
that  the  drawee  pays  before  the  draft  is  due;  for  instance,  if 
he  has  already  resold  the  goods  and  needs  the  documents;  in 
this  case  he  receives  an  interest  allowance,  generally  i  per  cent 
below  the  bank  interest  rate.  Only  partial  advances  are  made 
in  England  to  drawers  on  d/a  drafts,  nor  are  these  readily 
granted.  They  are  more  readily  taken  as  collateral  in  loans  on 
current  accounts  (overdrafts)  or  fully  discounted. 

The  drafts  are  generally  drawn  at  60,  90,  120,  and  some- 
times 180  days.  In  dealings  with  the  Far  East,  drafts  with  an 
interest  clause  predominate.  The  drawee  has  to  pay  in  addition 
to  the  face  value  of  the  draft  a  certain  interest  until  the  ap- 
proximate day  of  the  receipt  of  return  funds  in  Europe.  The 
drafts  read :  "With  interest  at  —  per  cent  per  annum  added 
thereto  from  date  hereof  to  approximate  due  date  of  arrival  of 


338  INTERNATIONAL  COMMERCE 

the  funds  in  London."  Such  interest-bearing  drafts  are  almost 
invariably  made  out  in  pounds  sterling. 

In  dealings  with  Asia  some  drafts  are  made  out  in  the  local 
currency  of  the  drawee.  On  Central  and  South  America  it  is, 
on  the  other  hand,  customary  to  draw  in  pounds  sterling  and, 
less  frequently,  francs  or  dollars.  Drafts  drawn  overseas  on  Lon- 
don are  almost  always  in  pounds  sterling.  Where  they  are  thus 
drawn,  the  drawee  can  pay  in  his  home  currency  at  the  collect- 
ing bank's  current  rate  of  exchange  on  either  sight  or  60  and 
90  days'  drafts  on  London.  The  drafts  are  made  to  read :  "Pay- 
able at  the  current  drawing  rate  for  the  (say)  Anglo- South 
American  Bank's  draft  at  demand  (or  60  days'  sight)  on  Lon- 
don." 

In  the  payment  of  invoices  the  drafts  drawn  by  the  seller 
are  drawn  either  on  the  buyer  or  on  some  English  bank.  In  the 
export  trade  drafts  on  the  buyer  predominate,  in  the  import  trade 
drafts  on  the  bank.  In  the  case  of  consignments  for  export 
drafts  are  drawn  on  the  consignee,  and  sometimes  on  the  local 
branch  of  a  London  bank;  in  the  case  of  consignments  for  im- 
port, drafts  are  drawn  either  on  a  London  bank  or  also  on  some 
large  import  house. 

Remittances  bought  at  the  buyer's  home  to  pay  for  purchases 
from  London  are  not  customary  excepting  in  places  where  busi- 
ness is  done  on  open  account.  The  importer  can  procure  these 
either  in  the  market  from  exporters  having  claims  on  London 
(documentary  bills),  which  is  sometimes  done  in  Central  and 
South  America,  or  he  buys  from  the  bank  drafts  drawn  on  Lon- 
don, which  is  sometimes  done  in  the  Asiatic  trade.  These  drafts 
are  called  bank  bills  or  credits,  because  they  are  drawn  for  credit 
purposes  by  one  bank  on  another.  For  payments  in  London  and 
other  places  in  Europe  oversea  banks  sell  so-called  T.  T.'s  (tele- 
graphic or,  more  correctly,  cable  transfers  of  money ). 

To  repeat,  the  major  part  of  the  business  of  the  English 
banks  in  oversea  settlements  is  to  take  up  documentary  drafts, 
either  for  collection  or  for  payment  and  advances  thereon,  or 
for  acceptance  on  commission  basis.  Occasionally  the  buyer 
overseas  has  a  credit  with  the  bank  in  London  and  authorizes  the 
latter  to  pay  invoices  out  of  same.  This  very  best  of  all  methods 
of  financing  shipments,  however,  is  comparatively  seldom  used. 


ENGLISH  DEAFT  ROUTINE  339 

Mere  collecting  of  drafts  is  only  a  minor  activity  of  the 
London  banks.  The  exporter  seeks  to  get  cash  for  his  drafts  as 
quickly  as  possible  and  will  not  often  wait  for  maturity.  It  is 
mostly  in  business  with  Central  and  South  America  that  drafts 
are  turned  over  to  the  banks  for  collection.  Most  London  banks 
have  special  rules  and  regulations  for  the  collection  of  drafts. 
They  always  exclude  liability  for  losses  in  connection  with  same. 
They  decline  responsibiliity  for  documents  handled  by  them,  for 
merchandise  which  they  may  be  called  upon  in  the  course  of 
events  to  take  over,  for  the  solvency  or  remittances  of  their 
agents  or  correspondents,  etc.  But  they  generally  undertake  to 
use  all  care  and  diligence  in  the  interest  of  their  clients. 

The  regulations  insist  on  the  client  giving  clear  instructions 
as  to  what  is  to  be  done  with  the  draft  in  the  case  of  non-ac- 
ceptance or  non-payment,  regarding  the  disposal  of  the  merchan- 
dise in  the  same  event,  as  well  as  with  regard  to  discount  for 
payment  ahead  of  maturity.  Instructions  are  also  frequently 
asked,  as  well  as  suggestions  made,  with  regard  to  including  in 
the  draft  a  clause  referring  to  the  rate  of  exchange  in  the  event 
of  payment.  For  each  draft  the  London  banks  have  special  code 
words  permitting  instant  cable  advices  at  nominal  cost.  The 
draft  regulations  also  cover  the  points  of  collection,  commis- 
sions, and  charges. 

The  commission  differs  from  point  to  point,  but  for  places 
where  the  banks  maintain  their  own  branches,  it  is  generally 
one-half  of  1  per  cent.  For  other  places  the  commission  is  a  little 
higher,  in  order  to  include  the  correspondent's  charges,  or  the 
latter  are  sometimes  separately  provided  for.  For  small  drafts 
there  is  generally  set  down  a  minimum  amount  of  commission, 
differing  in  accordance  with  locality,  from  2s.  6d.  to  10s.,  gen- 
erally figuring  about  5s.  When  the  drafts  are  not  honored  some 
banks  reduce  their  commission,  while  others  charge  it  whether 
the  draft  is  honored  or  not.  Postage  and  other  expenses  are 
figured  separately.  In  some  places  there  is  a  local  exchange, 
which  reduces  the  amount  realized  in  the  interior  points  of  an 
oversea  market  when  remitted  to  one  of  the  principal  points. 

On  the  whole,  it  may  be  said  that  in  English  usage  the  cus- 
tomer has  to  assume  the  cost  of  collecting  the  drafts  and  for- 
warding the  proceeds  to  the  seller.     For  this  reason  the  drafts 


340  INTEENATIONAL  COMMERCE 

either  include  these  expenses  in  their  face  value  or  bear  the  clause 
"charges  for  collection  to  be  added,"  or  on  South  Africa  and 
Australia  "remitting  exchange  to  be  collected." 

The  principal  sphere  of  activity  of  these  English  banks  for 
foreign  trade,  as  already  stated,  lies  not  in  the  mere  collection 
of  these  drafts,  but  in  the  financing  of  export  and  import  ship- 
ments. But  it  is  said  that  it  is  the  business  of  the  export  mer- 
chants to  finance  these  shipments.  Indeed,  the  financing  of  ex- 
ports and  imports  is  considered  a  more  important  function  of 
the  commission  merchants  than  their  mediation  in  securing  busi- 
ness. While  this  is  true,  without  the  aid  of  the  banks  the  export 
and  import  merchants  would  find  their  capital  far  too  inadequate 
for  such  financing.  They  undertake  to  finance  foreign  trade 
only  partly  with  their  own  capital,  but  very  largely  with  the  aid 
of  the  credit  which  they  enjoy  with  the  banks  because  of  their 
capital  and  the  business  transacted  by  them.  Few  of  their  clients 
would  enjoy  the  financial  assistance  of  these  same  banks  to  a 
similar  extent. 

In  the  financing  of  foreign  business  through  the  London 
banks  export  and  import  trade  are  subject  to  entirely  distinct 
treatment,  and  for  the  purpose  of  the  present  report  we  are  in- 
terested primarily  in  the  export  end  of  their  activity. 

One  of  the  means  of  financing  foreign  shipments  is  by  ad- 
vances on  drafts.  These  advances  are  charged  for  generally  on 
the  basis  of  6  per  cent,  while  the  ordinary  London  bank  rate, 
of  course,  is  much  lower.  When  such  a  draft  sent  in  for  col- 
lection and  debited  with  a  partial  advance  is  finally  paid,  the  ex- 
porter receives  the  balance  between  the  interest-bearing  advance 
and  the  net  proceeds  of  the  draft,  commission,  postage,  etc.,  hav- 
ing been  deducted.  These  bills  "sent  for  collection  and  advanced 
against"  are  thus  different  from  "bills  sent  for  collection  only," 
and  a  lower  rate  of  commission  is  granted  on  the  latter.  In  the 
first  case,  because  of  the  high  rate  of  interest  charged,  the  com- 
mission and  postage  charges  are  omitted,  but  where  the  advance 
was  made  at  the  ordinary  low  interest  rate  (distinct  from  the  6 
per  cent  oversea  rate) ,  commission  and  other  charges  are  added, 
the  same  as  on  "bills  for  collection  only."  This  partial  advanc- 
ing of  money  by  London  banks  on  drafts  sent  for  collection  is 
frequent  in  the  South  American  business. 


STERLING  DRAFTS  341 

Here  we  must  differentiate  between  pound  sterling  drafts 
bearing  interest  and  those  that  do  not  bear  interest.  In  the  for- 
mer case  interest  is  provided  for  until  the  approximate  day  of 
receipt  of  return  funds  in  London,  and  the  bank  advancing 
money  on  the  draft  receives  its  interest  charges  from  the  drawee. 
When  the  proceeds  are  received  in  England  there  is  a  final  ac- 
counting with  the  drawer.  Sometimes  practically  the  full  amount 
of  the  draft  is  advanced,  and  in  the  end  there  may  be  again  a 
final  accounting,  showing  a  small  balance  in  favor  of  or  against 
the  drawer. 

Pound  sterling  drafts  on  oversea  markets  without  interest 
clause  are  discounted  by  the  bank.  The  discount  rate  may  be 
based  on  the  higher  interest  for  oversea  trade  (generally  6  per 
cent),  in  which  case  no  commission,  postage,  or  other  expense 
is  charged.  The  drafts  may  be  on  English  colonies  where  the 
sterling  currency  prevails  or  on  other  countries  where  the  draft 
is  paid  in  some  local  currency  which  must  be  first  converted  into 
English  money  at  the  bank's  buying  rate. 

While  at  first  sight  it  would  seem  that  the  pound  sterling  is 
the  same  in  South  Africa  and  Australia  as  it  is  in  England  there 
is  nevertheless  an  "exchange"  factor  determining  the  value  of 
remittances  at  a  certain  period  after  sight  on  certain  points.  The 
The  English  banks  quote  varying  buying  rates  for  sight,  30  days', 
60  days',  90  days'  sight,  etc.,  for  South  Africa,  Australia,  etc. 

We  have  seen  that  the  English  usage  permits  the  seller  to 
charge  the  buyer  with  the  costs  of  collecting  the  remittance. 
All  the  costs  of  the  drafts  are  usually  added  to  the  invoice  and 
included  in  the  face  value  of  the  draft,  so  that  when  the  exchange 
is  deducted  the  net  due  amount  remains.  If  this  is  not  done  the 
exporter  includes  in  the  draft  the  clause  "exchange  to  be  add- 
ed" or  "with  exchange  for  negotiating  bills  on  the  colonies  at  cur- 
lent  rate  and  stamp  duties." 

In  the  case  of  pound  sterling  drafts  on  countries  where  the 
local  currency  is  different  there  is  another  element.  Beyond  the 
control  of  the  drawer  drawing  rates  on  remittances  from  the 
oversea  point  on  London  may  change  from  day  to  day.  The  seller 
draws  for  1,000  pounds  sterling  on  a  customer  in  Chile.  The 
customer  may  not  like  the  day's  rate  of  exchange  on  sterling, 
as  he  must  turn  in  Chilean  pesos  and  have  the  amount  converted 


342  INTERNATIONAL  COMMERCE 

into  sterling.  This  is  provided  for  by  a  clause  "payable  at 

drawing  rate  on  day  of  payment." 

When  the  Standard  Bank  of  South  Africa  announces  that 
its  buying  rate  for  Cape  Town  is  one-half  of  i  per  cent  for  sight 
bills,  i  per  cent  for  30  days'  sight,  1%  per  cent  for  60  days' 
sight,  2V4  per  cent  for  90  days'  sight,  and  2%  per  cent  for  120 
days'  sight,  each  30  days'  maturity  difference  is  based  on  one- 
half  to  five-eights  of  1  per  cent,  or  6  to  7V2  per  cent  per  an- 
num. 

The  Anglo-South  American  Bank  may  on  a  given  day  quote 
the  following  buying  rates  for  South  America: 

East  coast,  2  per  cent  sight,  2V2  per  cent  30  days'  sight,  3 
per  cent  60  days'  sight,  3%  per  cent  90  days'  sight. 

West  coast,  2V2  per  cent  sight,  3  per  cent  30  days'  sight, 
3%  per  cent  60  days'  sight,  4  per  cent  90  days'  sight. 

It  will  be  seen  that  here  each  30  days  corresponds  to  one- 
half  of  1  per  cent,  or  6  per  cent  per  annum,  and  that  there  is  a 
difference  of  one-half  of  1  per  cent  between  east  and  west  coasts 
buying  rates,  based  on  additional  distance.  Four  per  cent  on  a 
90  days'  bill  on  the  west  coast,  figured  at  6  per  cent  per  annum, 
would  show  that  the  bank  expects  to  be  out  its  money  8  months 
— 1  month  for  the  draft  to  reach  its  destination,  90  days'  sight, 
1  month  for  return  remittance,  and  another  90  days'  sight  on 
same. 

In  the  case  of  drafts  drawn  in  other  currencies  than  pounds 
sterling  on  Asiatic  places,  the  banks  publish  special  buying  rates 
based  on  exchange  quotations.  Good  customers,  however,  are 
in  a  position  to  procure  better  rates  than  those  generally  quoted. 
This  is  done  in  connection  with  bills  for  very  important  amounts. 

In  addition  to  advances,  partial  or  total,  on  drafts,  and  even 
to  the  outright  purchase  of  drafts,  English  banks  give  advances 
on  consignments,  drawing  on  the  consignee  for  either  the  full 
value  or  part  of  the  value  of  the  invoice.  The  security  of  the 
bank  is  in  the  draft  and  in  the  goods.  The  draft  bears  the  sig- 
nature of  the  drawer,  which  is  one  part  of  the  security;  the 
other  part  lies  in  the  goods  until  the  latter  are  turned  over  to 
the  consignee.  If  the  goods  are  to  be  turned  over  little  by  little 
against  partial  payments,  the  bank  has  a  valuable  security  in  its 
hands.     If  the  goods  are  to  be  turned  over  against  acceptance 


LETTERS  OF  LIEN  343 

of  a  draft,  the  bank  provides  for  a  lien  on  the  goods,  not  regard- 
ing the  additional  signature  a  sufficient  security  for  losing  con- 
trol of  the  shipment.  The  consignee  obliges  himself  to  consider 
the  goods  and  the  proceeds  as  mortgaged  to  the  bank.  The  con- 
signee must  always  hold  either  the  documents  or  the  goods  them- 
selves at  the  disposal  of  the  bank  and  remit  proceeds  for  the 
sale  as  the  goods  are  being  sold.  They  are  booked  separately  and 
the  proceeds  are  handled  entirely  apart  from  other  funds  of  the 
consignee. 

The  sender  acknowledges  the  bank's  mortgage  rights  in  a 
so-called  letter  of  hypothecation.    This  reads  in  part  as  follows : 

"The  above  shipment,  the  goods  and  the  proceeds  thereof 
are  to  be  treated  as  specially  hypothecated  to  you  by  .way  of  col- 
lateral security."    Or,  "the  said  goods  in  the  meantime,  and  their 

proceeds,  or  any  part  theerof,  to  be  held  by in  trust,  on 

your  behalf,  for  payment  of  the  said  sum."  The  bank  can  in- 
struct the  consignee  regarding  fire  insurance,  sale,  etc.  The  re- 
cipient of  the  advance  also  specially  binds  himself  to  guard  the 
bank  against  any  loss  in  connection  with  failure  to  sell,  etc. 

The  consignee  signs  a  letter  of  lien  or  a  letter  of  trust.  This 
reads:  "We  hereby  engage  to  receive  and  hold  the  said  goods 
in  trust  in  your  behalf,  to  have  them  duly  stored,  insured  against 
fire,  and  to  remit  to  you  the  proceeds  as  and  when  sold." 

It  is  frequenly  the  custom  for  shippers  of  many  shipments 
to  various  consignees  to  turn  over  to  their  bankers  a  general 
letter  of  hypothecation  for  advances  against  their  shipments.  It 
is  only  in  the  rarest  instances  that  other  shipments  than  consign- 
ments are  handled  in  this  mariner,  for  only  a  very  weak  customer 
will  sign  a  letter  of  lien  on  an  out-and-out  purchase.  But  in 
consignments  the  consignor  not  only  has  the  benefit  of  an  ad- 
vance on  the  shipment,  but  also  the  advantage  of  a  careful  con- 
trol on  the  spot  by  the  bank. 

In  the  case  of  financially  weak  exporters  sending  goods  to 
buyers  whose  standing  is  well  known  to  the  bank,  the  bank  fre- 
quently awaits  cable  notice  of  acceptance  of  the  draft  before 
making  an  advance.  It  might  be  said  that  the  bank  is  secured 
by  the  shipping  documents,  but  when  it  is  considered  that  the 
bank  has  no  means  of  knowing  the  contents  of  the  shipment  or 
whether  they  correspond  to  the  invoice,  the  security  can  not  be 


344  INTERNATIONAL  COMMERCE 

regarded  as  ample.  In  all  of  the  other  cases  already  discussed, 
we  have  assumed  that  the  standing  of  the  seller  is  satisfactory 
to  the  bank.  The  standing  of  the  customer  is  a  minor  considera- 
tion. In  the  case  of  really  first-class  shippers  the  banks  will 
make  the  required  advances  even  without  hypothecation. 

Occasionally  the  shipper  will  give  his  bank  a  general  power 
of  attorney  authorizing  the  bank  to  act  in  any  eventuality,  guar- 
anteeing it  against  loss  through  non-acceptance  or  insolvency  of 
the  debtor  before  maturity  and  all  expenses,  and  agreeing  to  a 
recourse  under  any  conditions,  relieving  the  bank  from  all  res- 
ponsibility or  loss  in  connection  with  forced  sales,  etc.  Then 
the  bank  undertakes  to  advance  money  against  such  shipments 
right  along^  without  special  agreements  from  case  to  case. 

Another  method  of  financing  foreign  shipments  is  by  letters 
of  credit.  The  customer  overseas  may  enjoy  a  certain  credit  with 
the  bank  overseas.  Either  his  standing  or  his  letter  of  trust  or 
his  actual  deposits  in  the  bank  may  induce  the  latter  to  instruct 
the  bank  in  London  to  honor  drafts  on  its  client  in  connection 
with  orders  sent  to  certain  parties.  This  letter  of  credit  may  be 
limited  to  a  certain  maximum  sum.  The  bank  reserves  also  the 
right  to  cancel  its  promise  before  shipment,  but  the  drawer  of 
the  draft  is  always  bound  by  his  signature.  The  bank  acts  only 
as  buyer  of  the  draft.  While  this  class  of  letters  of  credit  is 
not  equivalent  to  actual  cash  payment,  inasmuch  as  the  seller  is 
not  relived  of  recourse,  it  is  much  valued,  first,  because  the  ex- 
porter is  not  using  his  own  credit  with  the  banks ;  second,  be- 
cause such  an  authority  to  draw  is  an  indication  of  the  solvency 
of  the  customer.  This  class  of  letters  of  credit  is  really  an 
authority  to  draw  on  the  cutsomer,  coupled  with  a  promise  by 
the  bank  to  honor  such  drafts,  though,  with  recourse,  and  is 
based  on  the  standing  of  the  oversea  buyer. 

Another  important  method  of  financing  foreign  shipments 
by  banks  is  when  they  permit  the  shipper  to  draw  on  them,  prom- 
ising to  accept  the  draft.  Here  payment  is  not  mode  immedi- 
ately, but  the  bank  must  be  secured  before  payment  is  made — 
that  is,  before  the  accepted  draft  matures.  This  is  of  value  to 
the  exporter  because  an  acceptance  by  a  first-class  English  bank 
can  always  be  changed  into  cash  in  the  market,  and  also  becaues 
instead  of  a  partial  advance  the  exporter  has  the  entire  sum  due 


BANK  ACCEPTANCES  345 

him  at  his  disposal.    The  bank  is  not  out  any  money,  and  it  pro- 
vides for  being  fully  covered  before  maturity. 

How  is  the  bank  covered?  Here  the  bank  acts  as  an  agent 
for  the  buyer.  Its  risk  is  much  greater  than  where  it  acts  as 
an  agent  of  the  seller  and  has  his  signature  and  the  documents 
as  security.  Such  transactions,  as  stated,  are  entirely  on  the  basis 
of  the  credit  standing  of  the  customer.  The  accepting  bank 
takes  control  of  the  goods,  turns  them  over  against  a  letter  of 
trust  or  promissory  note,  or  stores  the  goods  at  destination,  turn- 
ing them  over  against  warrants  to  the  buyer. 

When  the  bank  authorizes  the  seller  to  draw  and  promises 
to  honor  the  draft,  we  have  an  instance  of  a  confirmed  letter  of 
credit.  Here  the  bank,  as  a  rule,  can  not  cancel  such  an  author- 
ization. The  bank  binds  itself  to  accept  drafts  to  a  certain  stipu- 
lated amount,  and  this  confirmed  letter  of  credit  contains  the 
clause :  "We  hereby  agree  with  you  and  also  with  the  indorsers 
of  bona  fide  holders  of  bills  drawn  in  conformity  with  the  terms 
of  this  authority  that  the  same  shall  be  accepted  on  presentation 
and  be  paid  at  maturity." 

Different  from  financing  by  bank  acceptance,  the  bank  act- 
ing as  the  agent  of  the  buyer,  is  the  financing  by  acceptance  of 
the  bank  acting  as  the  agent  of  the  seller.  The  last-named  method 
is  mostly  used  in  consignment  business.  The  bank  finances  the 
transactions  by  lending  its  acceptance;  it  receives  the  shipping 
documents  and  a  letter  of  hypothecation ;  the  buyer  receives  the 
documents  against  the  letter  of  lien,  and  promises  to  pay  the 
bank  direct  in  first-class  bank  bills  or  by  a  cable  transfer.  If  the 
funds  are  not  received  before  maturity  the  consignor  is  obliged 
to  cover  the  bank  in  cash,  but  may  draw  again  and  again,  pay- 
ing an  extra  commission  of  about  one-half  of  i  per  cent  every 
three  months.  The  business  is  still  financed  by  the  bank  through 
these  renewals.  This  is  customary,  for  instance,  in  business  with 
China. 

In  addition  to  financing  business  transactions  between  Europe 
and  oversea  markets,  the  English  banks  mediate  between  dif- 
ferent overesa  territories.  An  Australian  buying  from  a  house 
in  Hongkong  may  give  the  latter  a  90  days'  sight  credit  in  Lon- 
don as  payment.    The  Australian  is  in  business  connection  with 


346  INTERNATIONAL  COMMERCE 

the  London  bank,  has  credit  with  it,  while  the  Hongkong  mer- 
chant can  use  a  London  credit  to  the  best  advantage,  as  there 
is  always  a  good  market  for  London  bills  in  Hongkong. 

The  service  of  the  English  banks  in  the  financing  of  for- 
eign shipments,  as  outlined  in  the  foregoing  pages,  is,  on  the  one 
hand,  more  conservative  than  that  of  the  German  banks  for 
which  the  English  system  has  served  as  a  model,  and,  on  the 
other  hand,  more  thorough-going  in  assisting  exporters  of  assured 
financial  standing.  There  is  not  in  the  English  system  that  ex- 
tensive ramification  of  long-term  industrial  credit,  partly  due  to 
the  peculiarly  intimate  connection  between  banks  and  industrial 
enterprises  which  is  characteristic  of  Germany.  But  the  English 
banks  for  foreign  trade  have  subdivided  the  export  field  in  such 
businesslike  fashion,  honeycombing  each  section  with  branches, 
agencies,  and  correspondents,  and,  through  the  undisputed  posi- 
tion which  London  still  maintains  as  the  center  of  the  financial 
transactions  in  international  business,  are  so  well  placed  to  serve 
their  clients  that  the  English  export  trade  can  not  help  but  de- 
rive the  utmost  advantage  therefrom. 

The  English  export  merchants  have  been  longer  in  the  field 
than  many  of  their  competitors.  The  best  among  them  maintain 
organizations  in  foreign  markets  which  are  unapproached  by 
rivals  of  any  other  nationality.  The  reliability  of  the  English 
export  merchants  of  the  better  class  is  a  byword  in  oversea  coun- 
tries. 

The  British  manufacturers,  similar  to  the  German,  show  a 
tendency  to  eliminate  the  export  merchant  in  their  dealings  with 
foreign  customers,  but  the  export  merchant  is  securely  intrenched 
in  many  markets,  in  which  his  services  are  more  appreciated  by 
the  customer  than  a  possible  saving  through  dealing  direct  with 
the  manufacturer. 

With  regard  to  credit  accommodations  to  foreign  customers, 
the  export  merchants  of  Great  Britain  and  the  British  oversea 
banks  meet  the  demand  adequately,  but  the  tendency  is  to  keep 
down  the  length  of  credit  terms.  Where  foreign  competition 
seeks  to  gain  trade  by  offering  longer  credits,  other  things  being 
equal,  the  British  export  merchant  and  manufacturer  is  apt  to 
let  the  trade  go  rather  than  encourage  a  policy  recognized  in 
England  as  harmftu. 


THE  BANK  OF  ENGLAND  347 

Generally  speaking,  the  British  manufacturer  who  exports 
direct  seeks  to  get  his  money  as  quickly  as  possible.  By  utiliz- 
ing the  excellent  service  of  credit  information  through  the  Lon- 
don banks,  he  is  willing  enough  to  make  use  of  the  various 
methods  of  furnishing  reasonable  credit  accommodation  to  for- 
eign customers  described  in  the  foregoing  paragraphs,  but  the 
credit  terms  are  generally  shorter  than  those  granted  by  the  Ger- 
mans. 

A  review  of  British  export  and  banking  conditions  would 
be  incomplete  without  a  renewed  reference  to  the  important  po- 
sition of  the  Bank  of  England  in  dictating  the  rate  of  discount. 
Monetary  conditions  throughout  the  entire  world  are  affected  by 
it.  As  far  as  the  financing  of  exports  from  England  is  con- 
cerned, the  authoritative  character  of  the  Bank  of  England  rate 
has  a  most  far-reaching  effect  upon  stabilizing  the  money  mar- 
ket and  the  conditions  relating  to  the  discount  of  commercial 
paper  in  general. 

Margraff  (International  Exchange)  aptly  summarizes  the 
effects  of  the  discount  rate  of  the  Bank  of  England,  as  follows : 

i.  It  establishes  the  minimum  rate  at  which  the  Bank  of 
Engaland  will  discount  acceptable  paper. 

2.  It  fixes  the  rate  of  interest  allowed  by  London  joint-stock 
companies  on  short  deposits,  since  this  rate  is  1V2  per  cent  under 
the  Bank  of  England  rate. 

3.  It  determines  the  rate  of  interest  allowed  by  London 
bankers  on  cash  balances  to  the  credit  of  foreign  correspondents, 
keeping  active  accounts  with  them,  inasmuch  as  this  rate  is 
usually  one-half  to  1  per  cent  below  the  Bank  rate. 

4.  It  serves  also  to  fix  the  rate  of  interest  charged  on  cash 
overdrafts,  on  running  accounts,  as  debt  balances  are  generally 
subject  to  the  Bank  rate,  or  one-half  to  1  per  cent  above,  ac- 
cording to  agreement. 

5.  It  establishes  the  open-market  discount  rate  in  Great 
Britain,  at  which  private  bankers,  London  joint-stock  companies, 
and  discount  houses  will  discount  paper  for  local  or  foreign  ac- 
count, the  rate  ordinarily  being  from  one-fourth  to  one-half  of 
1  per  cent  below  the  Bank  rate. 


348  INTERNATIONAL  COMMERCE 

6.  It  governs  also  the  "retirement  rate  of  discount,"  on 
documentary  payment  bills,  which  is  the  rate  of  interest  rebated 
to  the  drawee,  or  acceptor,  for  prepayment. 

7.  It  affects  the  value  of  all  international  bills  of  exchange, 
as  an  advance  in  the  Bank  rate  either  advances  the  rate  of  ex- 
change for  a  demand  sterling  draft  in  a  foreign  country  or  de- 
preciates the  worth  of  a  long-term  sterling  bill,  as  the  interest 
rate  for  credit  balances  and  the  discount  rate  for  long-time  paper 
are  dependent  upon  the  Bank  rate. 

8.  It  has  the  power  of  protecting  the  gold  reserve  held  by 
the  Bank  of  England  and  of  checking  any  protracted  movements 
of  gold  importations  by  foreign  nations,  inasmuch  as  an  ad- 
vance in  the  Bank  rate  adjusts  the  rates  of  foreign  exchange  to 
£  point  where  such  operations  become  unprofitable. 

9.  It  attracts  the  deposits  of  foreign  banks  with  London 
correspondents,  as  an  advance  in  the  Bank  rate  to  a  point  in  ex- 
cess of  the  earning  capacity  at  home  induces  Continental  money 
lenders  to  seek  the  London  market  for  the  investment  of  their 
funds. 


CHAPTER  XV. 

C.    The  Foreign  Credit  Problem  in  America  Before  the 
Enactment  of  the  Federal  Reserve  Act. 

i.     The  American  Exporter  and  the  Problem  of  Foreign 
Credits  before  1914. 

In  considering  the  pre-war  attitude  of  the  American  manu- 
facturer to  the  subject  of  financing  foreign  shipments  and  to 
export  credits,  I  prepared  the  following  summary  in  my  mono- 
graph on  "Foreign  Credits"  {"Foreign  Credits,"  Special  Agents 
Series  62,  Department  of  Commerce,  Washington,  1913)  : 

American  manufacturers  have  been  persistently  criticized 
for  indifference  to  the  need  of  credit  on  the  part  of  their  for- 
eign customers,  and  their  alleged  lack  of  liberality  contrasted 
with  the  more  accommodating  attitude  of  their  British  and  Ger- 
man competitors. 

A  careful  inquiry  both  in  Germany  and  in  the  United  King- 
dom failed  to  reveal  that  the  manufacturers  of  tflese  nations 
are  more  willing  or  better  prepared  to  grant  long  terms  of  credit 
to  oversea  customers  than  American  manufacturers.  The  ex- 
port trade  was  in  the  hands  of  export  merchants  having  establish- 
ments of  their  own  in  their  particular  spheres  of  activity  over- 
seas. The  business  of  these  export  merchants  was  largely  financed 
by  banks  specially  catering  to  this  trade,  and  the  need  of  buyers 
in  those  markets  for  credit  accommodation  (which  need  is,  in- 
deed, a  real  one)  was  met  by  the  co-operation  of  banks  at  home 
and  overseas  with  the  exporter  and  the  buyer.  A  tendency  to  en- 
ter into  direct  business  relations  with  foreign  customers  was,  to 
be  sure,  apparent  both  in  Germany  and  in  Great  Britain,  and 
manufacturers'  associations  in  both  countries  did  their  utmost  to 
foster  direct  business,  but  in  the  bulk  of  the  export  trade  done 
by  both  countries  direct  trade  by  manufacturers,  and  particularly 
on  a  credit  basis,  was  almost  a  negligible  quantity,  being  confined, 
as  far  as  the  Germans  were  concerned,  to  sporadic  efforts  with 


350  INTERNATIONAL  COMMERCE 

the  more  stable  sections  of  the  export  field,  and  as  far  as  Eng- 
land was  concerned,  principally  to  the  English  colonies 

In  the  case  of  these  direct  dealings  with  the  export  markets 
neither  German  nor  British  manufacturers  were  in  a  better  posi- 
tion than  the  Americans  to  carry  on  their  books  a  number  of 
foreign  credit  risks  for  lengthy  periods.  The  manufacturer  can 
not  tie  up  his  capital  in  such  transactions.  He  must  have  cash 
within  a  reasonable  period  of  time  after  he  ships  the  goods  or 
he  can  not  keep  on  manufacturing. 

Of  course  where  the  German  or  the  British  manufacturer 
found  it  necessary  to  extend  long  credit,  both  had  at  their  dis- 
posal the  same  remarkably  adequate  machinery  for  financing 
foreign  shipments  as  the  export  merchants,  only  that  the  ex- 
porter's transactions  with  any  one  bank  specializing  in  the  trade 
with  a  certain  section  of  the  export  field  are  bound  to  be  far 
more  important  in  volume  than  those  of  an  individual  manu- 
facturer, and  the  merchant  is  better  able  to  cater  to  foreign  de- 
mand for  credit. 

On  the  whole  the  German  manufacturer  in  shipping  goods 
abroad  direct,  and  to  a  much  greater  degree  even  the  British 
manufacturer  doing  a  similar  business,  refused  to  grant  long 
credits  to  foreign  customers  indiscriminately.  Any  reader  of 
British  consular  reports  will  find  that  the  British  manufacturers 
are  blamed  as  faithfully  and  regularly  as  the  American  manu- 
facturers in  the  matter  of  restricted  credit  accommodation  to 
foreign  customers.  German  manufacturers  shortly  before  the 
war  met  with  severe  losses  in  attempting  to  do  a  direct  business 
in  the  Far  East,  particularly  in  Japan  and  China,  and  in  other 
export  markets,  and  regarded  the  subject  of  foreign  credits  in  a 
spirit  of  chastened  reluctance.  The  entire  system  of  long-term 
credits  was  severely  condemned.  Prominent  financiers  cautioned 
the  trade  against  it,  and  the  tendency  to  restrict  credits  as  far 
as  possible  was  distinctly  noticeable. 

The  attitude  of  the  same  manufacturers  was  quite  different 
when  we  take  up  for  consideration  (as  distinct  from  the  so-called 
"oversea"  markets)  the  dealings  of  German  and  British  manu- 
facturers with  other  European  countries.  Here  the  manufacturers 
are  within  easy  access  to  their  customers.  The  German  manu- 
facturer could  do  business  with  his  customer  in  Austria,  Italy, 


FOREIGN  CREDITS  351 

France,  Russia,  and  other  European  countries  very  much  as 
the  American  manufacturer  in  Canada.  In  the  report  of  the 
British  Commercial  Mission  to  Canada  we  read  literally  the 
following:  "Then  there  is  the  matter  of  terms  of  credit.  Amer- 
ican firms  are  said  in  particular  to  be  much  more  elastic  than 
their  British  competitors  in  regard  to  the  requirements  of  their 
customers,  and  do  all  in  their  power  to  facilitate  matters  for 
them."  Here  we  find  American  manufacturers  held  up  as  a 
pattern,  and  the  British  manufacturers  censured.  What  does 
this  really  mean  ?  Nothing  more  than  that  when  American  manu- 
facturers find  it  reasonably  safe  to  extend  rational  credit  they 
are  not  averse  to  doing  it,  as  long  as  it  is  compatible  with  busi- 
ness methods. 

American  manufacturers  have  been  blamed  for  adhering 
stubbornly  to  the  principle  of  "cash  against  documents  in  New 
York"  in  their  business  dealings  with  foreign  customers.  The 
report  on  "Foreign  Credits"  analyzes  the  replies  of  American 
manufacturers  to  a  question  blank  prepared  by  the  compiler, 
from  which  it  will  be  seen  that  very  many  American  manufac- 
turers do  not  hesitate  to  sell  abroad  on  credit.  It  will  be  ob- 
served that  the  most  successful  manufacturers  have  long  ago 
adapted  themselves  to  the  needs  of  the  markets  cultivated  by 
them,  whether  it  be  in  the  matter  of  styles,  or  of  packing,  or  of 
credit.  The  credit  problem  has  been  satisfactorily  solved  by 
those  manufacturers  who  have  studied  the  subject  practically  and 
without  prejudice,  and  with  the  knowledge  of  proper  limits. 

In  describing  the  German  methods  of  financing  foreign 
shipments,  it  was  carefully  explained  why  the  customer  overseas 
needs  credit;  we  have  also  referred  to  the  difficulty  of  the 
manufacturer  in  meeting  this  need,  which  is  always  a  greater 
difficulty  when  dealing  with  out-of-the-way  markets,  and  a  much 
simpler  matter  when  dealing  with  adjacent  territories,  though 
they  be  under  a  foreign  flag.  We  have  described  the  place  of 
the  export  merchant  in  the  economy  of  German  and  British  ex- 
port, and  have  also  discussed  the  part  of  the  banks  in  Germany 
and  England  in  the  financing  of  the  export  trade. 

The  esssential  principles  underlying  the  need  of  credit  are 
the  same  when  the  dealings  of  American  manufacturers  with 


352  INTEENATIONAL  COMMERCE 

their  foreign  customers  are  concerned  and  need  not  be  here  re- 
peated. However,  at  this  point  the  various  shades  of  attitude 
shown  by  American  manufacturers  to  the  subject  of  foreign 
credit  may  be  taken  up.  We  have  already  mentioned  one  policy 
which  many  critics  of  American  methods  claim  to  be  essentially 
and  characteristically  American :  "Cash  against  documents  in 
New  York."  This  attitude,  however,  is  by  no  means  irrational 
at  a  certain  stage  of  a  manufacturer's  experience  in  the  export 
trade.  The  manufacturer  does  not  know  his  customer,  he  parts 
with  his  goods,  and  he  refuses  to  do  so  until  he  is  paid  the  en- 
tire value  of  the  shipment.  He  does  not  know  the  conditions 
in  the  export  market.  He  is  afraid  that  he  may  have  trouble  in 
collecting  the  money  due  him  if  he  were  to  let  the  goods  pass 
from  his  control  without  payment.  To  be  sure,  he  sends  his 
goods  on  credit  to  customers  at  home,  but  he  has  a  better  grip 
on  the  situation.  He  knows  his  rights  in  his  own  country,  he 
is  familiar  with  the  remedies  in  case  of  non-fulfillment  of  con- 
tract, he  can  keep  track  of  the  changing  financial  condition  of 
his  customer.  He  is  closer  to  his  customer  in  distance  and  mor- 
ally. He  speaks  the  same  language.  He  can  send  an  employee 
to  see  his  customer  at  a  moment's  notice  and  at  small  expense. 
The  manufacturer  demands  "cash  against  documents  in  New 
York"  in  order  to  avoid  the  risk  of  doing  a  credit  business  with 
customers  located  where  recovery,  in  the  event  of  non-payment 
or  other  difficulties,  is  a  troublesome  matter.  To  this  extent  the 
manufacturer  shows  prudence. 

If  this  attitude  is  assumed  from  reasons  of  rational  pru- 
dence, it  is  subject  to  revision  on  the  part  of  the  manufacturer 
to  such  extent  as  it  may  be  shown  him  where  and  how  it  may 
be  revised  with  reasonable  safety.  The  American  manufacturer 
has  learned,  for  instance,  the  lesson  that  credit  risks  in  Canada 
are  not  essentially  different  from  those  in  his  own  country. 

It  is  only  when  a  manufacturer  stubbornly  refuses  even  to 
study  ways  and  means  to  carry  on  his  business  with  his  foreign 
customer  on  a  basis  of  reasonable  credit  accommodations  that 
the  "cash  against  documents  in  New  York"  policy  may  be  refer- 
red to  as  unreasonable.  But  even  in  this  case  it  may  be  due  to 
the  realization  that  he  can  not  act  as  a  banker  to  a  number  of 
foreign  risks,  carrying  them  on  his  books  for  varying  periods 


FOREIGN  CREDIT  POLICY  353 

of  time.     In  other  words,  he  may  admit  the  customer  to  be  de- 
serving of  credit,  but  is  unable  to  accommodate  him. 

Even  such  manufacturers  may  reconsider  their  policy  on  the 
subject  of  foreign  credits,  if  it  may  be  shown  them  how  they 
can  meet  the  need  of  their  foreign  customers  for  credit  without 
at  the  same  time  tying  up  their  capital  in  outstanding  accounts. 
We  will  refer  to  this  when  taking  up  the  functions  of  those  banks 
in  the  United  States  which  cater  to  foreign  business. 

American  manufacturers  interested  in  the  export  trade  may 
be  roughly  divided  into  the  following  groups :  Manufacturers 
with  a  foreign  sales  organization  and  manufacturers  without  a 
foreign  sales  organization.  Another  division  may  be  made  into 
manufacturers  selling  direct  from  their  home  office  or  from 
their  New  York  office,  and  manufacturers  maintaining  resident 
branches  or  agents  abroad.  Still  another  division  is  manufac- 
facturers  selling  direct  and  manufacturers  selling  through  com- 
mission merchants.  Where  sales  are  made  through  commission 
merchants  all  risk  is,  indeed,  eliminated  so  far  as  the  manufac- 
turer is  concerned,  as  he  is  paid  before  the  goods  are  shipped 
abroad,  or  it  is  converted  into  a  domestic  risk,  if  the  commis- 
sion merchant  himself  is  a  recipient  of  credit  accommodations 
from  the  manufacturer. 

Manufacturers  having  no  foreign  sales  organization  are 
without  means  of  developing  a  foreign  credit  policy  based  upon 
a  systematic  study  of  foreign  markets  in  relation  to  the  intro- 
duction of  their  goods  on  terms  accorded  by  their  foreign  and 
domestic  competitors.  For  them  a  foreign  order  must  be  gen- 
erally converted  into  a  domestic  order  by  passing  through  a  com- 
mission house  in  New  York  or  elsewhere  or  by  the  requirement 
of  "cash  against  documents  in  New  York."  It  is  really  this 
class  of  American  manufacturers  who  may  be  interested  in  the 
export  trade  to  the  extent  of  placing  an  advertisement  in  one  or 
more  export  papers,  or  whose  goods  may  have  come  before  the 
notice  of  a  foreign  inquirer  without  solicitation,  who  are  the 
principal  adherents  to  the  "cash  against  documents"  policy.  Not 
possessing  a  foreign  sales  organization,  it  would  be  unwise  for 
them  to  grant  credit  abroad,  because  they  do  not  know  how  to 
do  it.  Indeed,  some  manufacturers  so  situated  may  be  doing  a 
credit  business  without  knowing  it,  when  they  sell  by  time  drafts 


S54  INTERNATIONAL  COMMERCE 

against  documents  and  negotiate  these  drafts  at  once  with  an 
American  bank.  As  has  already  been  pointed  out,  the  recourse 
element  of  these  transactions  stamps  them  emphatically  with 
every  feature  of  a  credit  risk. 

Manufacturers  having  a  foreign  sales  organization  in  the 
course  of  time  are  bound  to  adopt  a  policy  with  regard  to  for- 
eign credits.  This  policy  depends  on  five  elements :  The  goods, 
the  manner  of  marketing  the  goods,  the  markets,  the  customers, 
ond  the  manufacturers  themselves. 

With  regard  to  the  goods,  where  these  are  special  articles 
in  which  the  manufacturer  fears  no  competition,  he  is  in  the 
happy  position  of  being  able  to  dictate  his  own  terms.  There  are 
goods  which  nobody  else  makes  or  nobody  else  makes  as  well ; 
the  foreigners  must  have  them,  and  they  will  have  them  on  any 
terms.  Such  lines  partaking  of  a  character  of  a  monopoly  are 
not  numerous.  Again,  there  are  lines  which  by  the  usage  of  the 
trade  are  considered  "cash  lines,"  not  only  in  the  United  States 
but  also  abroad.  In  other  lines  the  manufacturer  asks  himself 
the  question :  "Are  my  goods  so  superior  to  those  of  my  com- 
petitors that  my  foreign  customers  will  buy  largely  of  them, 
even  if  my  terms  of  credit  are  more  stringent  than  thoes  of  my 
competitors?"     The  answer  will  dictate  his  policy. 

The  next  element  is  that  of  locality.  Here  the  manufacturer 
must  ask  himself  the  questions :  "What  are  the  local  needs  dic- 
tating the  demand  for  credit  in  this  particular  market?  What 
are  the  shortest  possible  terms  on  which  I  can  market  my  goods 
there  safely  and  on  a  sufficient  scale?"  Here  again  the  competi- 
tors' terms  must  be  considered,  as  well  as  the  local  bank  rates 
for  credit  accommodation,  the  manner  in  which  the  customers 
themselves  (if  they  buy  to  sell  to  others)  dispose  of  their  goods, 
and  such  local  conditions  as  the  standard  of  business  morality, 
etc. 

The  manner  of  marketing  is  next  in  importance.  The  manu- 
facturer may  sell  wholly  or  partly  through  American  commis- 
sion houses.  To  that  extent  his  business  is  practically  a  domestic 
one.  He  may  sell  through  branches  located  abroad,  and  here 
again  the  credit  is  domestic,  as  far  as  the  branch  is  concerned. 
He  may  sell  through  foreign  resident  agents  or  he  may  sell 
direct 


FOREIGN  CREDIT  POLICY  its 

Closely  akin  to  this  is  the  important  feature  of  the  class  of 
customers  to  which  the  goods  are  sold.  The  customers  may  be 
wholesale  importers,  small  dealers,  or  even  consumers.  The  first 
are  generally  good  risks,  the  second  may  or  may  not  be  to  a  cer- 
tain limit,  and  the  third  may  be  found  anywhere  in  the  range 
of  financial  responsibility,  from  a  small  planter  to  a  government 
enterprise  of  absolutely  unquestionable  character.  The  standing 
of  the  customer  must  be  the  deciding  element  in  the  transac- 
tions. 

There  are  also  variations  according  to  races  and  nationali- 
ties. In  certain  sections  of  West  Africa,  for  instance,  only 
European  houses  are  desirable  customers.  In  India  there  is  a 
vast  difference  between  business  methods  of  Parsees,  Hindus, 
and  Europeans,  and  trading  with  each  class  is  conducted  dif- 
ferently. 

Finally,  the  manufacturer  himself  is  to  be  considered.  Is 
the  manufacturer  one  to  formulate  a  procrustean  credit  policy 
and  force  all  customers  to  adapt  themselves  to  it,  or  will  he 
shape  his  policy  to  suit  the  needs  of  his  customers,  as  far  as  he 
can  with  due  regard  to  his  own  exigencies? 

2.     Credit  Information. 

One  of  the  principal  functions  of  a  foreign  sales  organ- 
ization, next  to  selling  the  goods,  is  to  provide  for  the  collection 
of  the  proceeds  of  sales.  Where  credit  is  granted,  at  home  or 
abroad,  the  basis  for  credit  lies  in  the  knowledge  of  the  cus- 
tomer's financial  standing. 

At  home  the  task  of  passing  upon  the  worthiness  of  a  cus- 
tomer to  obtain  credit  accommodations  devolves  upon  the  credit 
man.  This  official  has  an  intimate  knowledge  of  the  means  of 
obtaining  credit  information  on  the  standing  of  customers 
through  the  various  sources  at  his  disposal,  consisting  of  the  re- 
ports of  mercantile  agencies  (general  and  appertaining  to  the 
different  industries),  his  own  ledger  experience  with  the  pro- 
posed risk,  interchange  of  this  experience  with  other  houses  sup- 
plying the  same  customer,  mostly  in  non-competing  lines  (though 
of  late  years  the  wisdom  of  houses  in  the  same  line  interchang- 
ing credit  experience  has  become  more  and  more  patent  to  credit 


366  INTERNATIONAL  COMMERCE 

men  throughout  the  country),  advices  from  banks,  information 
furnished  by  traveling  salesmen,  and  the  thousand  and  one  ave- 
nues of  keeping  tab  on  the  customer  open  to  a  wide-awake  cred- 
it man. 

Perhaps  in  no  other  country  is  the  system  of  furnishing 
credit  information  on  the  standing  of  domestic  customers  so  uni- 
versal as  in  the  United  States,  and  certainly  nowhere  does  the 
customer  more  readily  furnish  to  mercantile  agencies  statements 
of  his  own  financial  condition  as  in  the  United  States.  To  re- 
fuse to  furnish  a  statement  to  a  recognized  mercantile  agency 
is  a  serious  matter  for  any  business  man.  It  arouses  instant 
suspicion,  and  no  trader  can  assume  such  an  attitude  unless  he 
is  willing  to  restrict  his  credit  requirements  to  a  narrow  range 
of  houses  to  which  he  may  be  known  personally. 

The  credit  man  also  well  realizes  the  fact  that  he  can  gen- 
erally get  into  immediate  touch  with  the  customer;  he  can 
readily  verify  any  excuse  offered  by  a  customer  asking  for  an 
extension  of  time,  or  he  can  take  precautionary  measures  when 
overbuying  is  reported  to  him,  and  he  can  adjust  credit  to  the 
risk's  ability  to  pay,  to  his  relative  promptness  in  payments,  and 
to  any  variations  in  the  customer's  standing  as  reported  to  him 
by  the  agencies.  Finally,  if  the  customer  fails  to  live  up  to  his 
contracts,  he  can  make  use  of  the  machinery  of  law  for  re- 
covery, and  he  is  intimately  acquainted  with  all  the  workings  of 
the  same.  Even  so,  bad  accounts  are  constantly  encountered, 
and  losses  through  fraud,  bankruptcy,  and  other  causes  are  by 
no  means  uncommon.  The  credit  man  can  guard  himself  against 
these  as  well,  for  there  are  companies  which  will  indemnify 
against  loss  by  bad  accounts,  for  a  nominal  sum,  providing 
credit  has  been  extended  with  the  observance  of  certain  specific 
precautions. 

When  dealing  with  foreign  risks  the  domestic  credit  man 
is  generally  at  sea.  Unless  he  has  made  a  special  study  of  for- 
eign credit  conditions  in  the  various  foreign  markets,  he  deals 
with  unknown  quantities.  He  may  not  know  how  to  obtain  de- 
pendable credit  information  on  the  standing  of  foreign  cus- 
tomers; he  may  be  unfamiliar  with  the  means  of  safeguarding 
foreign  accounts ;  he  may  be  unaware  of  the  methods  of  keep- 
ing in  touch  with  the  fluctuations  in  his  customer's  financial 


CREDIT  INFORMATION  357 

standing;  he  may  be  at  a  loss  when  confronted  with  the  nec- 
essity of  collecting  abroad.  In  short,  all  those  elements  of  ex- 
pert knowledge  and  ripe  experience  which  constitute  his  own 
value  as  a  domestic  credit  man  are  lacking  when  he  comes  to 
deal  with  foreign  credits.  And  conditions  in  almost  every  ex- 
port market  are  so  different  from  those  at  home  that  the  do- 
mestic credit  man,  if  he  is  to  pass  efficiently  on  foreign  credits, 
must  acquire  this  lacking  knowledge  and  experience,  or  employ 
a  trained  credit  man  for  foreign  work,  or,  as  frequently  happens, 
turn  over  the  task  to  the  export  manager,  who  is  naturally,  in 
the  first  instance,  a  sales  manager  and  not  a  credit  man. 

What  are  the  means  by  which  the  credit  man  can  ascertain 
whether  a  shipment  to  a  foreign  customer  should  or  should  not 
be  made.  For  after  all  that  is  the  problem  before  the  credit 
man  in  each  concrete  instance.  He  can  turn  for  information 
to  one  of  the  mercantile  agencies,  or  to  an  association  maintain- 
ing a  credit  information  department,  or  to  an  American  bank 
with  branches  abroad  or  with  foreign  connection  or  to  a  foreign 
bank,  either  having  a  branch  in  the  United  States  or  not.  Finally 
the  Foreign  Credit  Interchange  Bureau  of  the  National  Associa- 
tion of  Credit  Men,  recently  organized,  is  a  step  in  the  right  di- 
rection, giving  an  opportunity  to  members  to  exchange  ledger 
experience. 

Of  the  mercantile  agencies  in  this  field  the  premier  is  that 
of  R.  G.  Dun  &  Co.,  which  was  established  in  1857  and  main- 
tains now  68  foreign  offices.  Its  organization  is  thoroughly  ex- 
cellent and  it  furnishes  an  efficient  service  in  every  way.  The 
company  has  a  vast  accumulation  of  credit  reports  on  file  and 
has  facilities  for  prompt  information  in  all  parts  of  the  world. 

The  Bradstreet  Company  was  next  in  the  field  and  on  a 
smaller  scale  parallels  the  works  of  the  mercantile  agency  re- 
ferred to  above.    It  has  offices  in  a  number  of  foreign  countries. 

These  organizations  furnish  credit  reports  as  a  business 
proposition,  on  the  basis  of  a  graduated  charge  in  accordance 
with  the  number  of  reports  desired. 

The  National  Association  of  Manufacturers  and  the  Phila- 
delphia Commercial  Museum  likewise  maintain  well  equipped  cred- 
it information  departments  and  their  credit  reports  are  furnished 
by    correspondents    throughout    the    world    and    are    carefully 


358  INTEENATIONAL  COMMERCE 

checked.  In  addition  to  correspondents  in  all  principal  centers 
who  supply  the  basic  information,  they  also  make  inquiries  both 
at  home  and  abroad,  and  on  the  main  their  reports,  though  some- 
what varying  in  quality  in  accordance  with  the  difficulty  of  se- 
curing reliable  information  in  out  of  the  way  countries,  where 
the  credit  report  is  even  more  of  guesswork  than  it  naturally  is 
even  in  commercially  advanced  countries,  manage  to  convey  to 
the  credit  man  as  accurate  a  reflection  of  the  credit  standing  of 
a  foreign  customer  as  it  is  humanly  possible  to  obtain  through 
investigation.  This  system  is  slightly  more  elastic  than  that  used 
by  mercantile  agencies  maintaining  their  own  branches,  and  in 
his  desire  to  get  all  the  information  possible  the  credit  man  will 
consult  all  of  these  sources. 

Since  legislation  made  it  possible  for  banks  to  maintain 
branches  in  foreign  countries,  the  National  City  Bank  has  opened 
a  large  number  of  such  branch  establishments  and  a  great  deal 
of  attention  is  paid  by  it  to  the  accumulation  of  credit  infor- 
mation on  the  standing  of  concerns  either  buying  or  likely  to 
buy  American  products  within  the  sphere  of  activity  of  each 
branch.  Banks  maintaining  no  branches  but  having  foreign  cor- 
respondents, such  as  the  Irving  National  Bank,  National  Bank 
of  Commerce  and  other  institutions  have  also  devoted  particular 
attention  to  the  matter  of  building  up  efficient  credit  report 
bureaus. 

While  the  services  of  the  mercantile  agencies  are  open  to  all 
who  pay  the  fees,  the  associations  provide  such  services  chiefly 
to  members  and  the  banks  naturally  to  their  clients.  The  re- 
ports of  the  banks  are,  as  a  rule,  much  shorter  and  devoid  of 
miscellaneous  information,  but  briefly  state  the  capital  and  the 
financial  standing,  the  degree  of  trustworthiness  and  the  approx- 
imate limit  of  credit  to  which  the  risk  is  entitled.  The  credit 
man  can  never  have  too  much  information  and  will  do  well  to 
seek  it  through  his  banking  connections  in  addition  to  the  other 
channels.  As  a  matter  of  courtesy  many  foreign  banks  will 
supply  some  credit  information,  particularly  on  the  standing  of 
those  concerns  with  which  they  have  dealings.  The  credit  man 
will  do  well  not  to  rely  too  much  on  this  source  of  information, 
unless  he  is  a  client  of  the  bank  in  question :  foreign  banks  fur- 
nish such  information  as  a  matter  of  courtesy,  and  a  non-client 


CREDIT  INFORMATION'  S50 

cannot  impose  too  much  on  courtesy ;  their  views  are  based  on 
personal  experience,  which  may  be  interesting  as  an  added  ele- 
ment of  information,  but  does  not  in  all  cases  embrace  all  that 
is  worthy  of  knowledge. 

Among  the  foreign  sources  for  obtaining  credit  reports  on 
the  standing  of  customers,  there  are  banks  located  in  the  ter- 
ritory where  the  proposed  risk  is  in  business,  foreign  manufac- 
turers doing  business  with  same,  and  finally  references  given  by 
the  risk.  With  regard  to  the  banks,  these  will  generally  give  some 
brief  information  regarding  customers  whom  they  know.  For 
this  they  make  either  no  charge,  or  a  nominal  charge,  or  charge 
for  postage  only.  Government  banks  are  prohibited  from  giv- 
ing credit  information.  In  fact,  such  credit  information  should 
not  be  asked  except  of  banks  located  in  minor  points.  As  a  mat- 
ter of  courtesy  correspondence  should  be  in  the  language  of  the 
bank  addressed,  willingness  should  be  expressed  to  pay  the 
bank's  charge,  and  return  postage  (international  reply  coupon) 
inclosed.  Foreign  manufacturers  selling  to  the  proposed  risk- 
should  only  be  consulted  if  they  represent  entirely  non-compet- 
ing lines.  Remarks  regarding  correspondence  with  banks  apply 
in  this  case  also.  It  would  be  unwise  to  correspond  regarding 
credit  with  competing  manufacturers  abroad,  for  although  very 
likely  a  courteus  and  accurate  reply  would  be  received,  such  a 
course  might  be  the  reverse  of  politic. 

Where  references  given  by  the  customer  are  communicated 
with,  the  fact  that  this  is  done  at  the  latter's  suggestion  should 
always  be  mentioned  in  the  inquiry.  If  the  references  are  for- 
eign, remarks  regarding  correspondence  and  postage  made  above 
should  be  carefully  borne  in  mind. 

With  regard  to  the  use  of  any  of  the  sources  of  information 
available  to  American  manufacturers,  the  careful  credit  man  in 
charge  of  foreign  credits  will  find  it  useful  to  be  a  regular  sub- 
scriber to  one  or  more  of  the  agencies  mentioned.  This  point 
will  be  referred  to  again  a  little  further  when  we  consider  the 
relative  value  of  foreign  credit  reports.  It  will  sometimes  hap- 
pen that  the  credit  man  requires  his  information  at  once.  If 
one  agency  has  no  information  on  file,  another  might.  If  no 
agency  has  the  information,  a  bank  dealing  with  the  particular 
export  market  might  have  it.    The  banks  naturally  do  not  make 


360  INTERNATIONAL  COMMERCE 

investigations  beyond  those  necessary  for  their  own  dealings 
with  their  clients,  and  their  experience  is  generally  limited  to  such 
dealings.  Of  course  where  the  urgency  of  the  case  warrants  the 
inquirer  in  so  doing,  he  may  authorize  any  agency  or  credit 
bureau  or  bank  to  telegraph  or  cable  for  the  information  desired. 
Such  cable  reports  naturally  are  very  brief.  They  are  followed 
in  due  course  by  a  fuller  report  thorugh  the  mails.  The  agency 
may  also  cable  for  the  information  to  be  sent  by  mail,  or  may 
write  fully  stating  the  particulars  of  the  proposed  transaction 
and  offering  code  words  to  cover  any  emergency  in  reply,  and 
the  report  will  reach  the  agency  by  cable.  Cabling  charges,  and 
sometimes  a  little  extra  fee,  are  debited  in  such  cases  to  the  in- 
quirer. 

On  the  subject  of  the  value  and  the  meaning  of  a  credit  re- 
port there  is  a  great  deal  of  misconception  even  among  other- 
wise very  well  informed  credit  men.  Whether  received  from  a 
mercantile  agency  or  from  a  credit  bureau  or  from  a  bank,  a 
credit  report  is  merely  a  collation  of  opinions  regarding  the 
:-tatus  of  a  credit  risk,  gathered  through  inquiries  in  the  trade 
and  through  personal  observation  of  one  or  more  reporters  and 
aided  by  the  risk's  own  statement,  where  such  is  available.  A*t 
the  best  a  credit  report  is  guesswork,  more  or  less  accurate  in 
accordance  with  the  care,  scope,  and  shrewdness  with  which  the 
inquiry  has  been  conducted.  It  is  never,  and  can  never  be,  a 
guaranty  that  a  transaction  with  the  risk  in  question  will  turn 
out  as  forecasted  in  the  report.  The  customer  will  always  be  a 
credit  risk.  It  leaves  to  the  credit  man  himself  to  answer  the 
question:  "Shall  I  ship  or  shall  I  not  ship?"  It  affords  no  check 
on  the  extent  to  which  the  foreign  buyer  utilizes  his  credit. 

The  credit  report,  in  order  to  be  of  value,  must  be  compiled 
with  care,  must  contain  as  much  information  as  possible  regard- 
ing the  nature  of  the  risk's  business,  the  approximate  financial 
worth  of  the  customer,  his  manner  of  paying  bills  at  home  and 
abroad,  his  character,  his  standing  in  the  community,  his  record, 
etc.  There  can  never  be  too  much  credit  information  in  a  for- 
eign report,  seeing  that  it  has  to  supply  the  credit  man  with  facts 
which  he  can  easily  ascertain  at  home  regarding  domestic  credit 
risks,  but  which  are  beyond  his  observation  in  a  foreign  point. 
The  report  must  make  the  credit  risk  a  living,  classified  propo- 


CREDIT  REPORTS  361 

sition,  instead  of  an  abstract,  impalpable,  indefinable  entity.  The 
credit  man  must  know  with  whom  he  is  doing  business,  how  he 
can  do  the  business  with  the  risk,  and  whether  and  how  far  he 
can  trust  him. 

The  American  credit  man  is  accustomed  to  his  domestic  re- 
port containing  a  great  deal  of  information  furnished  by  the 
customer  himself,  the  gist  of  opinions  gathered  from  the  banks 
nnd  in  the  trade,  extracts  from  court  publications  and  records 
of  any  judgments,  etc.,  as  well  as  the  observations  of  the  re- 
porter.    He  misses  many  of  these  details  in  foreign  reports. 

It  has  taken  many  years  to  educate  American  tradespeople 
into  willingly  furnishing  statements  of  their  financial  condition 
to  mercantile  agencies.  In  many  foreign  countries  business 
habits  are  so  different  from  ours  that  it  is  next  to  impossible 
either  to  demand  a  statement  from  a  customer  or  to  believe  it 
after  it  has  been  obtained.  Particularly  in  Latin- American  coun- 
tries and  in  the  Orient  a  request  for  a  statement  frequently  is 
regarded  as  an  insult  by  business  people,  large  or  small.  Still, 
a  gradual  change  is  being  worked  in  this  direction  by  the  real- 
ization that  the  furnishing  of  such  a  statement  will  eventually 
work  out  to  the  benefit  of  the  risk.  Nevertheless,  the  report  on 
a  foreign  risk  will  frequently  be  minus  the  familiar  recital  of 
figures  showing  the  capital,  assets,  debts,  etc.,  of  the  domestic 
risk,  which  at  home  often  includes  even  an  estimate  of  the  value 
of  his  office  fixtures,  etc. 

Due  to  the  difference  in  trade  organizations,  the  credit  man 
will  therefore  not  measure  the  foreign  report  by  the  standard  of 
an  average  American  credit  report,  either  in  size  or  in  the  quan- 
tity of  definite  data.  No  one  in  India  or  in  Turkey  or  in  many 
other  countries  can  tell  accurately  what  his  neighbor  is  worth, 
and  the  neighbor  won't  tell.  Some  very  good  foreign  customers 
will  as  soon  divulge  the  combination  of  their  safe  to  a  chance 
inquirer  as  state  just  what  they  are  worth,  to  whom  they  owe 
for  merchandise,  and  how  much  money  they  have  in  the  bank. 
Therefore,  except  in  commercially  well  developed  countries,  such 
as  Canada,  the  continent  of  Europe,  the  United  Kingdom,  and 
a  few  others,  a  report  will  be  even  more  of  a  "hearsay"  nature 
than  at  home. 

In  most  foreign  countries  information   regarding  a  credit 


3<i2  INTEBNATIONAL  COMMEKCE 

risk  will  be  the  result  of  inquiry  among  the  rivals  of  the  risk, 
among  houses  supplying  him  with  goods,  among  banks,  whole 
sale  houses,  etc.  For  this  reason  it  is  wise  to  procure  reports 
from  more  than  one  source.  No  one  reporter,  no  one  reporting 
office,  will  always  ascertain  all  of  the  ascertainable  data  regard- 
ing a  customer.  This  is  not  so  important  when  the  general  gist 
of  the  report  is  in  itself  decisive  for  a  given  transaction.  A 
report  may  read:  "  X  &  Co.  are  one  of  the  oldest  and  most 
honorable  houses  on  this  coast  and  have  been  in  business  for  up- 
ward of  40  years.  Their  wealth  is  several  hundred  thousand 
pounds  sterling."  This  will  fully  suffice  to  a  credit  man  con- 
sidering the  advisability  of  shipping  X  &  Co.  $300  worth  of 
goods.  Pages  of  most  detailed  data  would  not  alter  the  fact. 
On  the  other  hand,  the  report  may  read :  "Y  &  Z  are  a  notorious 
firm  of  international  swindlers,  warned  against  frequently  by 
consuls  and  others,"  and  the  matter  is  settled  again. 

These  examples,  of  course,  are  extreme,  but  they  tend  to 
show  that  mere  size  is  not  the  decisive  element  in  a  foreign  credit 
report.  What  decides  is  not  the  number  of  words  or  details, 
but  the  clearness  with  which  the  actual  standing  of  the  customer 
is  portrayed,  enabling  the  credit  man  to  come  to  a  decision.  Of 
course,  the  majority  of  proposed  risks  are  somewhere  in  the 
middle  between  the  two  quoted  extremes. 

When  the  credit  man  sends  his  inquiry  to  his  chosen  source 
or  sources  of  information,  he  will  find  it  a  great  incentive  to 
the  reporters  to  furnish  him  with  a  report  of  practical  value  if 
he  states  the  nature  of  the  proposed  transaction  or  the  reason 
for  his  inquiry.  The  credit  man  will  ask  himself  why  he  should 
divulge  the  nature  of  his  business,  but  a  little  consideration  will 
show  him  the  reason.  In  commercially  far-advanced  countries 
the  standing  of  every  regular  buyer  of  manufactured  products 
has  been  looked  into,  and  is  being  constantly  looked  into,  by  one 
or  more  mercantile  agencies  and  by  numbers  of  credit  men. 
Therefore  generally  a  report  is  available  that  will  be  fairly  com- 
plete and  from  which  the  credit  man  can  draw  his  conclusions. 
It  is  different  in  countries  less  advanced  commercially,  and  in 
lines  of  business,  such  as  agencies,  representations,  etc.,  where 
the  means  of  the  risk  are  less  capable  of  being  correctly  gauged. 
Uneducated  to  the  fact  that  it  is  to  his  benefit  to  furnish  an  ac- 


CREDIT  REPORTS  363 

curate  statement,  the  risk  may  refuse  to  furnish  it,  robbing  the 
reporter  of  one  of  the  important  avenues  for  thoroughly  looking 
up  the  standing  of  a  firm  and  checking  up  his  own  investigations 
with  the  firm's  signed  statement. 

If  the  report  is  furnished  with  data  regarding  the  prop- 
osed business  transaction  he  will  be  in  a  position  to  govern  his 
investigations  with  that  point  in  view.  The  results  will  be  more 
specific.  Credit  men  complain  that  frequently  reports  furnished 
them  lack  definite  data.  Perhaps  in  some  cases  their  inquiry 
lacked  definiteness. 

The    need    of  obtaining    information    from  more    than  one 
source  is  not  based  upon  criticism  of  any  mercantile  agency  or 
organization,  but  merely  upon  the  fact  that  in  many  instances 
some  particular  fact  or  transaction  bearing  upon  the  character 
of  a  firm  may  escape  the  knowledge  and  the  research  of  the 
best  reporter.    This  does  not  refer  to  houses  of  the  very  highest 
standing,  nor  is  it  necessary  to  search  any  further  when  a  mer- 
cantile agency  declares  a  risk  to  be  worthless.     But  that  vast 
multitude  of  middle-class  and  small  buyers  frequently  contains 
firms  which  will  make  an  effort  to  maintain  a  good  name  with 
one  or  two  banks  by  promptness  in  redeeming  drafts  and  neg- 
lect its  open  accounts ;    firms  that  may  keep  up  a  good  record 
with  one  manufacturer,  in  order  to  use  him  as  a  reference,  and 
be  otherwise  undesirable  customers  ;    firms  that  may  strictly  ad- 
here to  their  contracts,  and  yet  take  advantage  of  any  loophole 
left  them  by  some  error  or  negligence  on  the  part  of  a  shipper; 
firms  which  will  toe  the  mark  where  they  know  that  unfounded 
complaints  will  be   resisted,   and  prove   very   unpleasant  where 
they  think  they  can  do  so  without   trouble.      Individual  trans- 
actions of  this  kind  may  escape  the  notice  of  any  one  observer. 
Again,  in  many  of  the  minor  points,  where  mercantile  agen- 
cies do  not  maintain  their  own  branches,  the  reporter  may  be  a 
business   rival   of  the  concern  reported  on,   and  the  consulting 
of  several  sources  is  urgently  advisable.  The  consensus  of  opin- 
ion is  what  establishes  the  value  of  information  in  such  cases. 
The  danger  from  this  source  is  not  common,  because  of  the  care 
exercised  by  every  well-conducted  bureau  or  agency  in  selecting 
correspondents  where  they  have  no  branches,  and  because  these 
correspondents  only  in  rare  instances  would  attempt  to  jeopard- 


364  INTEENATIONAL  COMMERCE 

ize  their  connection  by  giving  a  prejudiced  report.  On  the  other 
hand,  all  reporters  are  human  and  in  spite  of  all  care  may  over- 
look or  misjudge  facts.  The  credit  man  will  never  expect  a 
credit  report  to  be  infallible. 

With  regard  to  definiteness  in  the  inquiry,  an  instance  will 
illustrate  the  point.  This  instance  is  one  of  the  most  flagrant 
cases  of  misconception  regarding  what  constitutes  a  report  that 
the  compiler  has  met.  A  manufacturer  requests  a  report  on  the 
character  and  standing  of  an  individual  in  an  Italian  city.  In 
due  course  the  report  comes :  "X  appears  to  be  an  honest  agent, 
but  has  been  here  very  a  short  time,  having  come  from  Messina, 
where  he  resided  before  the  earthquake."  The  report  is  very 
indefinite.  On  the  other  hand,  agents  maintaining  a  small  office 
can  hardly  be  reported  upon  even  in  New  York  City  with  much 
accuracy.  On  the  basis  of  this  report  a  misguided  manufacturer 
sent  a  remittance  for  several  thousand  dollars  to  the  agent,  for 
which  the  latter  was  to  ship  him  some  raw  material  used  in 
manufacture.  The  agent  shipped  goods  worth  only  a  fraction 
of  the  amount  received. 

Here  is  an  indefinite  report,  an  indefinite  inquiry,  and  the 
action  which  followed  the  report  was  not  warranted  by  it.  If 
the  manufacturer  had  inquired  whether  he  could  trust  the  man 
with  $5,000,  sending  the  money  in  payment  of  some  produce 
the  agent  was  to  buy,  the  reporter  would  have  promptly  replied 
that  there  was  no  material  guaranty  for  such  a  transaction.  If 
the  same  manufacturer  were  to  send  remittances  of  $5,000  to 
every  person  in  the  United  States  who  would  fit  the  description 
given  the  results  would  be  disastrous  to  him. 

The  credit  report  is  therefore  in  no  sense  a  credit  insurance, 
but  merely  an  aid  to  the  credit  man,  the  value  of  which  largely 
depends  upon  the  credit  man  himself  and  his  familiarity  with 
the  means  of  obtaining  credit  information  and  with  gauging  it 
after  it  is  obtained. 

It  would  be  well  for  a  credit  man,  in  making  his  inquiry, 
to  take  the  trouble  of  wording  it  something  like  this,  although 
the  reporting  agencies  might  consider  it  troublesome :  "Having 
in  mind  granting  X  &  Co.,  of  Manzanillo,  Cuba,  a  credit  of 
$1,000,  on  60  days,  I  wish  to  know  the  standing  and  character 
of  the  firm,  how  long  established,  the  name  of  their  bankers  at 


CREDIT  REPORTS  365 

home,  if  possible  the  names  of  houses  from  whom  they  buy  in 
this  country,  how  they  pay  their  foreign  and  local  bills,  their 
acceptances,  and  their  open-account  debts." 

In  addition  to  the  report  received,  the  credit  man  will  also 
consult  every  bank  or  business  house  with  which  the  risk  is  in 
any  connection,  as  may  be  seen  from  the  report. 

The  time  to  ask  for  a  credit  report  is  when  correspondence 
with  a  foreign  customer  is  initiated.  One  should  not  wait 
until  an  order  is  definitely  placed.  The  time  for  a  thorough  in- 
vestigation may  then  be  too  short.  Besides,  it  is  important  for 
the  manufacturer  to  know  with  whom  he  is  even  corresponding. 

A  credit  report  once  obtained  does  not,  like  wine,  improve 
with  age.  At  least  once  a  year  all  of  the  reports  on  foreign  cus- 
tomers should  be  renewed.  If  a  manufacturer  is  in  continuous 
business  transactions  with  a  foreign  customer,  each  variation 
in  the  promptness  of  payments  should  be  followed  by  an  inves- 
tigation; each  time  that  the  volume  of  buying  appears  to  exceed 
the  maximum  credit  previously  settled  with  promptness  a  new 
inquiry  should  be  made. 

When  the  customer  has  become  fairly  well  known  to  the 
manufacturer  it  may  be  conveyed  to  him  that  it  would  be  a 
benefit  to  him  to  file  a  confidential  statement  with  the  manufac- 
turer. Great  tact  and  delicacy  must  be  employed  in  such  a  re- 
quest, and  the  manufacturer  should  never  hesitate  to  state  that 
such  a  course  would  enable  him  to  act  as  a  reference  to  other 
manufacturers,  thus  aiding  the  customer  in  establishing  a  de- 
finite credit  standing. 

To  sum  up,  it  is  not  of  so  much  importance  to  a  manufac- 
turer to  know  the  value  of  risk's  fixtures,  etc.,  but  it  is  of  im- 
portance for  him  to  know  the  financial  ability,  the  methods  of 
payment,  the  integrity,  and  the  capacity  of  the  risk  to  take 
prompt  care  of  a  certam  credit  or  series  of  credits.  It  is  then 
not  the  size  of  the  report,  not  the  number  of  lines  contained  in 
it,  but  first  the  degree  to  which  it  authoritatively  answers  the 
questions  uppermost  in  the  mind  of  the  credit  man,  which  con- 
stitute its  value. 

One  of  the  essential  weaknesses  of  credit  reports  is  the  fact 
that  even  where  definite  information  is  given  that  such  and  such 
a   customer  is  entitled  to  a  credit  of  a  certain  amount,  there  is 


366  INTERNATIONAL  COMMERCE 

no  guarantee  that  the  proposed  risk  does  not  overextend  himself 
and  either  fraudulently  or  carelessly  use  the  full  limit  of  his 
creditability  not  only  in  the  aggregate  but  repeatedly  with  a  num- 
ber of  credit  grantors. 

The  only  way  to  prevent  this  is  by  some  organized  system 
of  exchange  of  ledger  experience.  Until  recently  there  has  ex- 
isted an  undisguised  spirit  of  jealousy  and  suspicion  which  pre- 
vented one  credit  man  from  approaching  another  with  regard 
to  ledger  experience.  It  was  not  desired  to  give  away  the  names 
of  customers. 

Within  recent  months  two  systems  have  been  devised,  one 
now  in  actual  operation,  the  other  still  in  the  consultative 
stage,  by  which  ledger  experience  may  be  exchanged  without 
any  fear  of  the  loss  of  trade  secrets.  The  National  Association 
of  Credit  Men,  New  York,  a  progressive  organization  compris- 
ing in  its  membership  the  foremost  credit  men  of  the  country 
has  inaugurated  this  service.  It  is  based  on  a  mutual  exchange 
of  credit  experience  through  the  central  clearing  house  in  New 
York.  A  special  membership  has  been  recruited  for  this  service. 
It  is  bound  to  be  exceedingly  helpful,  but  its  good  offices  are 
limited  to  membership.  The  membership  in  the  Foreign  Credit 
Interchange  Bureau  of  the  National  Association  of  Credit  Men 
during  the  first  month  of  its  activity  comprised  200  prominent 
exporters  and  manufacturers,  and  its  operation  from  the  very 
beginning  proved  a  brilliant  success  and  afforded  eminent  sat- 
isfaction to  the  users. 

The  second  organization  has  been  proposed  by  Mark  O. 
Prentiss,  Director  of  Public  Relations  of  the  National  Surety 
Company.  Mr.  Prentiss  advocates  the  incorporation  of  a  for- 
eign credit  clearing  house  as  a  business  corporation  operated  for 
profit,  with  the  backing  of  financial  and  manufacturing  interests. 
This  organization  will  collate  ledger  experience  and  other  data 
not  only  with  regard  to  merchandizing  risks  but  also  to  foreign 
securities  and  will  furnish  its  advice  to  all  bona-fide  American 
business  houses  against  compensation.  It  will  give  no  credit  in- 
formation but  will  pass  on  credits  and  give  answer  to  the  ques- 
tion in  the  mind  of  the  credit  man  and  of  the  investor  which  is 
"shall  I  ship  or  shall  I  not  ship?"  and  "shall  I  invest  or  shall 
I  not  invest?" 


CREDIT  CLEARING   HOUSE  367 

Operated  on  a  proper  basis,  with  suitable  backing,  this 
service  will  add  a  moral  guarantee  of  great  value  to  the  credit 
man.  Neither  the  effort  of  the  National  Association  of  Credit 
Men,  nor  the  Prentiss  plan  imply  any  thought  of  eliminating  the 
mercantile  agency  or  other  credit  bureaus.  They  are  merely 
designed  to  perfect  the  equipment  of  the  credit  man  in  meeting 
situations  in  which  ordinary  credit  reports  are  inadequate.  None 
knows  better  than  the  mercantile  agencies  that  credit  informa- 
tion is  not,  nor  indeed  can  be  an  exact  science.  And  no  credit 
man  will  disparage  the  merit  of  the  efforts  of  these  agencies 
and  credit  bureaus  in  the  promotion  of  safe  extension  of  credit 
to  foreign  countries.  The  limitations  of  the  usefulness  of  credit 
reports  are  inherent  to  them  as  efforts  of  human  agencies,  but 
up  to  the  full  limit  of  these  boundaries  they  are  of  immense  and 
actual  value  to  the  credit  man. 

3.     The  American  Banks  and  their  Services  to  Exporters 
before  the  Enactment  of  the  Federal  Reserve  Act. 

In  taking  up  direct  credit  dealings  between  American  manu- 
facturers and  their  foreign  customers,  we  may  first  consider  the 
simplest  method,  namely,  the  so-called  "open  credit."  While, 
on  the  one  hand,  it  is  referred  to  as  the  "simplest,"  being  un- 
attended by  many  of  the  formalities  connected  with  documentary 
credit,  it  is,  on  the  other  hand,  the  least  frequently  employed 
method,  for  the  reason  that  it  is  an  unsecured  transfer  of  the 
ownership  of  a  manufacturer's  products  to  a  customer  in  a  for- 
eign land,  and  substitutes  therefor  a  ledger  obligation  which,  in 
the  event  of  non-fulfilment,  must  be  enforced  by  more  or  less 
tedious  processess  of  law,  and  in  the  case  of  a  bankruptcy  nec- 
essarily ranks  with  other  unsecured  debts. 

To  grant  anyone,  whether  at  home  or  abroad,  a  line  of  open 
credit  implies,  first  of  all,  confidence  on  the  part  of  the  seller  in 
the  buyer.  It  has  taken  some  considerable  study  of  foreign  con- 
ditions, some  familiarity  with  foreign  buyers  and  their  habits, 
and  some  personal  experience  in  actual  dealings  with  them  to 
teach  those  manufacturers  who  are  doing  open-credit  business 
with  foreign  customers  that  it  is  just  as  safe— or,  for  that  mat- 
ter, just  as  risky — to  grant  open-credit  to  a  first-class  house  of 


368  INTERNATIONAL  COMMERCE 

acknowledged  integrity  in  a  foreign  market  as  at  home,  and,  on 
the  other  hand,  that  domestic  concerns  in  a  shaky  condition 
are  about  on  par  as  undesirable  credits  risks  with  similarly  situ- 
ated foreign  customers. 

Thus  we  find  American  manufacturers  granting  open  credits 
in  the  markets  which  they  have  studied  best,  in  Canada,  in 
Mexico,  in  Cuba,  on  the  continent  of  Europe,  and  in  the  United 
Kingdom,  and  so  on  as  they  become  acquainted  and  as  they 
find  the  customers  worthy  of  the  cerdit.  A  study  of  the  credit 
methods  employed  by  the  166  American  manufacturers  who  have 
responded  to  the  compiler's  circular  of  inquiry,  shows  a  signi- 
ficantly large  proportion  of  these  manufacturers  granting  credit 
here  and  there  to  customers  of  unquestionable  standing,  and  a 
remarkable  freedom  from  unpleasant  experiences. 

Houses  known  to  be  first  class  are  even  granted  open  credit 
in  some  of  the  countries  generally  considered  a  little  behind 
other  export  markets  in  stability ;  and,  on  the  other  hand,  less 
desirable  customers  are  refused  credit  even  in  near-by  territo- 
ries. Open-credit  dealings,  as  stated,  are  based  on  confidence. 
Confidence  is  the  result  of  satisfactory  credit  information  and 
experience. 

Next  to  the  necessity  of  basing  this  confidence  on  substan- 
tial grounds,  the  credit  man  must  exercise  judgment  in  appor- 
tioning the  amount  of  credit  to  the  needs  of  the  customer.  It 
is  best  to  agree  with  the  latter  (in  the  case  of  continuous  sup- 
plies) on  a  maximum  sum  to  be  outstanding  at  any  one  time, 
as  well  as  on  a  time  basis,  30,  60,  90,  or  more  days  (as  the  case 
requires)  within  which  every  invoice  must  be  paid,  interest  on 
outstandings,  etc.  There  may  be  times  when  the  maximum 
amount  granted  may  have  been  shipped,  and  other  orders  must 
be  got  ready  before  remittance  is  made.  A  certain  latitude  and 
elasticity  are  necessary,  but  the  credit  man  will  be  keenly  alive 
to  the  correlation  between  agreement  and  fulfilment.  Good 
reasons  may  fully  explain  and  justify  any  necessary  extension 
of  time  and  the  stretching  of  limit,  but  a  good  credit  man  is  a 
strategist  and  he  will  know  when  to  call  halt. 

In  open-credit  dealings  there  may  be  a  temptation  on  the  part 
of  a  minor  though  perfectly  worthy  customer,  when  about 
reaching  the  limit  of  credit  accommodation  granted  by  a  manu- 


OPEN  CREDITS  369 

facturer  and  for  some  reason  or  other  being  compelled  to  delay 
the  settlement  of  the  outstandings,  to  place  orders  with  rival 
suppliers.  A  wise  manufacturer  will  watch  that  he  be  not  made 
a  convenience  for  this  purpose.  If  a  retail  merchant  in  Havana  is 
stated  to  be  a  good  risk  for  $1,000,  and  having  bought  goods  to 
that  amount  from  his  regular  supplier  he  finds  himself  in  need 
of  more  goods  and  places  orders  for  similar  amounts  with  two, 
three,  or  more  manufacturers,  he  may  be  overbuying,  and  his 
credit  standing  is  to  that  extent  diminished.  In  dealings  with 
regular  customers  the  credit  man  will  encourage  them  to  perfect 
frankness  when  certain  circumstances  arise  which  necessitate 
additional  purchases  beyond  the  limit  granted.  Full  explanations 
and  some  extra  guarantee  for  the  excess  should  be  forthcoming 
rather  than  permit  the  unsatisfactory  policy  of  embroiling  a 
number  of  manufacturers  in  assuming  a  less  satisfactory  risk. 
The  checking  of  such  practices  is  the  principal  function  of  the 
credit  clearing  house,  a  species  of  which  we  have  in  the  Foreign 
Credit  Interchange  Bureau  of  the  National  Association  of  Credit 
Men. 

Open  credit,  of  course,  places  the  manufacturer  to  a  certain 
extent  at  a  disadvantage  as  compared  with  his  customer.  The 
latter  has  possession  of  the  goods  or  the  proceeds  of  the  sale 
thereof.  He  may  find  fault  with  them  and  clamor  for  arbitrary 
deductions  or  discounts.  For  this  reason  open  credit  should  not 
be  granted  to  any  firm  but  one  of  absolutely  unobjectionable 
business  methods.  There  are  firms  of  unquestionable  financial 
standing  but  of  questionable  business  tactics.  It  is  not  neces- 
sarily a  reproach  on  foreign  firms.  There  are  firms  of  similar 
type  in  the  United  States.  If  open  credit  is  restricted  to  per- 
fectly substantial  foreign  customers  whose  business  habits  are 
above  reproach  (and  there  are  very  many  of  these  in  foreign 
markets),  open  credit  abroad  is  as  safe  a  risk  (but  always  a 
risk)  as  open  credit  at  home. 

Collection  of  open-credit  indebtedness  may  be  made  in  sev- 
eral ways.  It  may  be  agreed  upon  that  each  invoice  be  settled 
at  so-and-so  many  days  by  a  direct  remittance  in  London  or  New 
York  funds,  or  remittance  may  be  arranged  each  mondi  on  the 
basis  of  settling  for  items  shipped  30,  60,  90,  or  more  days  back. 
Or  instead  of  the  remittance,  the  manufacturer  may  draw  at 


370  INTERNATIONAL  COMMERCE 

sight  or  three  days'  sight,  the  draft  to  be  presented  about  the 
time  the  items  are  due;  or,  again,  the  manufacturer  may  draw 
for  the  amount  of  an  invoice  at  the  time  of  shipment,  the  bill 
maturing  at  the  expiration  of  the  credit  limit  granted,  but  ac- 
ceptance being  exacted  at  the  time  of  the  arrival  of  the  goods. 
The  latter  system  is  favored  by  many  manufacturers  as  it  fixes 
a  definite  time  for  the  payment  of  an  individual  invoice. 

The  drafts  in  question,  of  course,  are  so-called  "clean  bills," 
in  contradistinction  to  "documentary  bills."  The  banks  seldom 
buy  these  clean  bills,  but  principally  accept  same  for  collection. 

When  business  is  done  through  the  commission  merchant, 
the  financing  is  done  by  the  commission  merchant,  and  when  the 
manufacturer  grants  open  credit  direct,  the  manufacturer  does 
the  financing.  When  goods  are  sold  "cash  against  documents 
in  New  York,"  or  "sight  drafts  against  documents  in  New 
York,"  the  financing  of  foreign  shipments  is  done  by  the  cus- 
tomer, either  direct  or  through  his  local  and  foreign  banking 
connections,  and  we  can  not,  therefore,  speak  of  "credit"  trans- 
actions. 

But  distinctly  in  the  nature  of  "credit"  transactions  are  the 
numerous  instances  in  which  goods  are  sold  against  time  draft 
attached  to  documents,  although  the  manufacturer  may  im- 
mediately sell  or  discount  the  draft.  The  possession  of  the 
money  equivalent  for  the  shipment  by  no  means  concludes  the 
transaction,  as  far  as  the  manufacturer  is  concerned.  He  may 
have  received  his  money,  but  his  responsibility  lasts  until  the 
customer's  payment  for  the  bill  has  finally  reached  the  bank. 

A  time  draft,  to  which  are  attached  the  documents  apper- 
taining to  a  shipment,  is  always  bought  or  discounted  by  a  bank 
with  a  distinct  recourse  clause,  meaning  that  in  case  the  customer 
does  not  settle,  the  manufacturer  is  bound  to  make  good  the 
amount  paid  him  by  the  bank.  This  transaction,  therefore,  is 
nothing  more  or  less  than  a  loan  made  by  a  bank  to  a  manufac- 
turer on  the  basis  of  the  confidence  the  bank  feels  in  the  manu- 
facturer's standing,  strengthened  by  the  evidence  of  a  bona  fide 
commercial  transaction  involving  the  transfer  of  a  supposedly 
valuable  shipment  to  a  supposedly  trustworthy  buyer  abroad. 
It  will  be  seen,  therefore,  that  the  standing  of  the  manufacturer 
is  the  principal  consideration.    The  bank  may  not  know  whether 


BILLS  OF  EXCHANGE  371 

the  contents  of  the  shipment  actually  correspond  to  the  invoice. 
It  presumes  that  the  manufacturer  has  taken  care  to  learn  about 
the  trustworthiness  of  the  foreign  customer,  although  it  does 
not  really  worry  about  the  latter,  unless  it  happens  to  know  that 
he  is  no  good  financially,  when  the  bank  will  refuse  to  negotiate 
the  papers,  because  it  would  not  pay  it  to  waste  correspondence, 
etc.,  in  the  matter,  the  failure  to  honor  the  draft  being  a  fore- 
gone conclusion. 

A  good  many  manufacturers  would  consider  it  below  their 
dignity  to  negotiate  loans  of  a  hundred  or  a  thousand  dollars 
with  any  bank,  but  they  do  not  hesitate  to  discount  their  drafts 
on  foreign  customers  for  similar  amounts,  eager  to  "close"  each 
transaction  connected  with  foreign  shipments.  They,  indeed,  do 
not  realize  the  loan  character  of  the  transaction.  Many  manu- 
facturers who  do  realize  this  element  of  the  draft-discounting 
business  prefer  to  send  their  drafts  for  collection,  either  to  their 
own  local  bankers  or  to  bankers  in  New  York  having  foreign 
departments,  or  to  a  bank  in  the  locality  of  the  debtor,  charging 
their  customers  interest  for  the  entire  time  they  are  out  their 
money,  and  preferring  to  do  their  own  financing  of  the  foreign 
shipment.  This  is  considered  by  a  large  number  of  prominent 
export  men  the  most  satisfactory  method,  where  the  aggregate 
capital  thus  tied-up  is  not  considerable,  of  course,  a  point  may 
be  reached  where  no  manufacturer  can  afford  to  further  finance 
his  foreign  customers. 

We  may  now  consider  the  meaning  and  standing  of  drafts 
in  general,  their  place  in  the  economy  of  foreign  financing,  as 
well  as  certain  details  in  connection  with  drawing,  discounting, 
and  collecting  drafts  drawn  by  American  manufacturers,  and  the 
nature  of  documents  attached  to  so-called  "documentary"  drafts. 

A  bill  of  exchange,  or  a  draft,  is  a  credit  instrument  drawn 
either  on  a  bank,  or  on  a  merchant,  or  on  any  debtor  who  gives 
the  creditor  a  right  to  draw  on  him.  According  to  Byles  on 
"Bills  of  Exchange,"  this  instrument  had  its  origin  in  ancient 
times  when  it  was  a  letter  of  credit  from  a  merchant  in  one  coun- 
try to  a  debtor,  a  merchant  in  another  country,  requiring  him 
to  pay  the  debt  to  a  third  party  who  carried  the  letter  and  hap- 
pened to  be  traveling  to  the  place  where  the  debtor  resided. 
It  is  an  order  by  one  party  to  another  requiring  'the  person  to 


372  INTERNATIONAL  COMMERCE 

whom  it  is  addressed  to  pay  on  demand,  or  at  a  certain  deter- 
mined future  time,  some  money  to,  or  to  the  order  of,  a  spe- 
cified person,  or  to  bearer.  A  check  is  merely  a  draft  drawn 
on  a  bank  payable  on  demand  to  a  third  party  or  to  bearer,  the 
funds  being  deposited  with  the  bank  to  the  credit  of  the  drawer. 
Time  and  space  are  elements  in  the  bill  of  exchange.  It  is  gen- 
erally payable  at  some  future  time  in  the  exchange  of  goods  be- 
tween persons  separated  by  distance.  The  original  essence  of 
a  bill  of  exchange  (Withers,  "The  Meaning  of  Money")  was  as 
a  claim  for  the  payment  of  a  debt  based  on  the  movement  of 
salable  produce  to  the  place  at  which  it  is  expected  to  find  a 
market.  The  person  receiving  the  goods  accepts  the  bill  as  pay- 
able at  a  certain  future  time  (maturity),  which  makes  the  paper 
immediately  negotiable  or  convertible  into  cash  by  the  process 
of  discount. 

We  are  not  concerned  in  reviewing  here  such  species  of 
the  bills  of  exchange  as  are  created  in  the  anticipation  of  crops, 
etc.,  or  are  drawn  by  a  house  on  its  own  branches  abroad,  or 
vice  versa,  known  as  "house  bills,"  or  also  as  single  name  paper 
or  finance  bills,  but  distinctly  with  drafts  appertaining  to  ship- 
ments of  American  manufactured  goods  from  the  United  States 
to  other  countries. 

We  have  seen  that  a  bank  in  discounting  a  draft  drawn  by 
a  manufacturer  on  a  foreign  customer  in  payment  for  a  ship- 
ment made,  simultaneously  actually  grants  the  manufacturer  a 
loan  for  the  amount  of  the  indebtedness  of  the  foreign  customer. 
The  bank  finds  its  security  in  the  standing  of  the  manufacturer, 
in  the  apparent  value  of  the  shipment  concerned,  and  lastly  in 
the  financial  ability  of  the  customer  whose  acceptance  takes  the 
place  of  the  goods  as  a  security  after  the  latter  have  passed  into 
his  possession.  Since  the  transaction  of  negotiating  a  draft 
through  the  bank  discounting  same  is  in  the  nature  of  a  loan, 
the  bank  may  justly  refuse  to  accommodate  a  drawer  of  whose 
standing  it  is  not  perfectly  sure. 

The  documentary  draft  is  accompanied  by  complete  "docu- 
ments." Chief  among  these  are  the  export  bills  of  lading  or  the 
ocean  bills  of  lading.  The  former  are  issued  by  a  railway  com- 
pany to  a  shipper  in  an  interior  point  and  relate  to  merchandise 
taken  by  the  railway  company  to  the  seaboard,  whence  a  steam- 


DOCUMENTARY   DRAFTS  373 

ship  line  carries  the  same  to  destination.  The  ocean  bills  of 
lading,  are  issued  by  the  steamship  or  sailing-ship  company  at 
the  port. 

Bills  of  lading  must  be  made  out  to  the  order  of  the  ship- 
pers and  by  them  indorsed  in  blank,  so  that  the  title  to  the  mer- 
chandise remains  as  a  lien  in  the  possession  of  the  holder  of  the 
bill,  and  all  copies  extant  must  be  delivered  to  the  bank  negotiat- 
ing the  draft.  Bills  of  lading  drawn  to  the  order  of  the  con- 
signee are  not  generally  accepted  by  the  banks  in  this  connec- 
tion because  they  furnish  no  security,  and  the  holders  of  such 
bills  of  lading  have  no  lien  on  the  goods.  Bills  of  lading  must 
be  made  out  in  duplicate  or  triplicate;  the  number  of  copies  is- 
sued must  always  appear  on  the  face  of  the  bill  of  lading.  Banks 
abroad  very  often  refuse  acceptance  of  bills  drawn  against  (rail- 
way) through  bills  of  lading,  because  they  object  to  bills  of  lad- 
ing signed  by  an  ordinary  railway  employee,  and  also  because 
the  actual  departure  from  port  is  not  apparent  therefrom,  where- 
as the  bank  may  be  instructed  to  honor  the  draft  if  the  ocean 
shipment  is  made  within  a  specified  time. 

The  merchandise  should  be  in  all  cases  insured  against 
marine  risks,  either  by  drawer  or  by  drawee,  and  in  the  former 
case  the  insurance  certificate  is  one  of  the  documents  attached 
to  the  draft.  The  insurance  generally  relates  to  the  interval 
between  the  time  the  goods  are  loaded  on  board  ship  until  they 
are  discharged  at  the  port  of  destination,  but  special  arrange- 
ments may  be  made  whereby  the  period  covered  includes  the 
entire  time  between  the  receipting  for  the  goods  by  the  steam- 
ship company's  agents  and  the  delivery  to  consignee.  The  cer- 
tificates of  insurance  are  generally  issued  by  the  exporters  under 
open  policies  of  insurance,  one  copy  of  the  policy  remaining 
with  the  marine  insurance  company,  and  another  remaining  in 
the  hands  of  the  exporter,  who  pays  his  premiums  regularly  and 
issues  his  own  certificate.  Insurance  certificates  should  like- 
wise be  made  out  to  the  order  of  the  shippers  and  indorsed  by 
them  in  blank,  so  that  the  holder  may  collect  direct  in  case  of 
loss.  The  insurance  should  cover  the  approximate  cost  of  the 
draft  and  is  generally  a  little  in  excess  of  the  invoice  value. 
Where  insurance  is  effected  abroad,  a  written  statement  to  that 
effect  must  be  made  by  the  drawer. 


374  INTERNATIONAL  COMMERCE 

A  shipper's  invoice  is  generally  attached  to  documentary 
drafts.  This  invoice  is  not  absolutely  necessary,  and  may  be 
placed  in  a  sealed  envelope  attached  to  the  draft,  so  as  to  avoid 
publicity  as  to  prices,  etc.  As  a  matter  of  fact,  it  is  not  neces- 
sary for  the  banker  to  see  the  invoice,  but  if  the  drawer  is  dis- 
honest (Afargraff,  "International\Exchange"),  then  he  can  in- 
flate the  invoice  values  anyway.  It  "is  the  integrity  of  the  drawer 
which  constitutes  the  chief  value  of  a  draft  with  documents  at- 
tached. 

We  need  not  here  enter  upon  a  discussion  of  the  details  of 
the  certificates  which  are  required  by  certain  countries,  such  as 
certificates  of  inspection,  weight  certificates,  etc.,  but  complete 
shipping  documents  should  accompany  each  documentary  draft, 
and  the  varying  character  of  same  may  be  ascertained  through 
the  usual  channels  of  information,  exporters'  handbooks,  for- 
warding agencies,  etc. 

Elsewhere  we  have  explained  the  difference  between  docu- 
mentary payment  and  documentary  acceptance  drafts.  The 
drafts  presented  by  American  manufacturers  for  discount  or 
collection  are  generally  of  the  latter  character. 

There  are  a  number  of  channels  open  for  American  manu- 
facturers who  wish  to  have  their  foreign  drafts  negotiated.  They 
can  go  to  their  own  local  banker,  and  if  the  latter  has  good 
New  York  connections  they  may  fare  practically  as  well  as  a 
manufacturer  discounting  his  bills  in  New  York  City.  It  is 
really  only  in  the  larger  transactions  that  an  appreciable  differ- 
ence will  be  found,  still  provided  that  the  local  banker  has  made 
reasonable  arrangements  with  any  American  bank  having  a  for- 
eign department. 

Where  the  transactions  are  of  sufficient  importance,  the 
manufacturer  may  *  find  it  to  his  advantage  to  make  inquiry 
among  the  large  handlers  of  foreign  exchange  in  New  York  City 
and  Chicago,  and  he  will  find  that  some  day  one  bank,  another 
day  a  different  bank,  will  be  able  to  give  him  better  rates,  al- 
though naturally  the  banks  do  not  like  this.  This  difference, 
slight  on  small  transactions,  but  of  importance  in  proportionately 
larger  ones,  is.  due  to  the  variations  in  the  demand  each  bank 
has  from  day  to  day  for  Certain  bills  and  the  supply  thereof. 


FOBMEE  AMERICAN   METHODS  875 

In  addition  to  the  national  banks  in  New  York  City  maintain 
ing  foreign  departments,  there  are  a  number  of  private  banking 
concerns  making  a  specialty  of  various  markets,  a  few  of  them 
doing  also  a  commission  business.  Lastly,  there  are  in  New 
York  the  agencies  of  foreign  banks  for  certain  territories,  such 
as  Australia,  South  Africa,  South  America,  Cuba,  etc. 

New  York  City  is  the  purchasing  center  of  foreign  exchange 
in  the  United  States.  It  absorbs  practically  the  entire  volume  of 
foreign  credit  balances  created  by  foreign  drafts  bought  by  Amer- 
ican bankers.  The  New  York  bankers  are  the  deciding  factor 
in  determining  the  prices  for  the  purchase  and  sale  of  bills  on 
all  foreign  countries,  as  far  as  United  States  is  concerned.  New 
York  foreign  exchange  brokers  send  daily  quotations  to  their 
western  clients,  and  our  international  trade  balances  are  adjusted 
by  New  York  City  bankers. 

In  considering  the  facilities  open  to  American  manufacturers 
prior  to  the  enactment  of  the  Federal  Reserve  Act,  the  author 
describes  the  situation  in  his  monograph  on  "Foreign  Credits'' 
as  follows : 

The  question  whether  the  American  manufacturer  is  or  is 
not  at  a  disadvantage  in  discounting  his  bills  on  foreign  coun- 
tries, as  compared  with  the  German  and  the  British  manufac- 
turers, is  a  difficult  one  to  answer  by  "yes"  or  "no."  When  re- 
ference is  made  to  individual  transactions  it  will  be  found  that 
an  American  manufacturer  of  standing  will  have  no  trouble  in 
having  his  ordinary  bills  on  most  foreign  countries  discounted 
by  American  bankers,  or  the  New  York  agents  of  foreign  banks, 
or  he  has  the  choice  of  sending  his  bills  for  collection  to  the 
banks  located  in  foreign  points,  and  it  is  apparent  that  in  either 
case  the  cost  of  the  transaction  to  him  is  no  greater  than  to  the 
German  or  to  the  British  shippers.  It  is  in  the  general  system 
of  financing  foreign  shipments  that  the  Europeans  have  the  ad- 
vantage. The  elastic  system  which  permits  banks  to  accept  bills 
drawn  on  them  by  their  customers,  who  can  have  these  bills 
rediscounted,  the  existence  in  Germany  and  in  England  of  au- 
thoritative institutions  laying  down  the  discount  and  loan  rates 
which  automatically  guide  the  entire  banking  system  in  its  deal- 
ings with  individual  clients,  and  finally  the  presence  of  an  open 
discount  market  which  permits  bankers  to  employ  funds  in  the 


376  INTERNATIONAL  COMMERCE 

purchase  of  bankers'  and  prime  merchants'  bills  and  to  redis- 
count same  when  cash  funds  are  needed — these  are  among  the 
principal  aids  to  a  freer  system  of  financing  the  foreign  business 
than  that  prevailing  in  the  United  States.  In  the  United  States 
paper  discounted  for  a  bank's  customers  is  held  until  maturity 
and  is  so  much  dead  weight  in  the  bank's  vaults,  the  operations 
being,  therefore,  necessarily  restricted;  in  fact,  it  is  only  be- 
cause American  bankers  are  able  to  discount  bills  purchased 
from  American  exporters  in  the  foreign  money  markets  that 
they  are  at  all  in  a  position  to  negotiate  such  bills  for  their  cus- 
tomers*). 

To  sum  up  the  review  of  the  American  manufacturer's 
credit  problem,  the  following  facts  may  be  pointed  out : 

i.  A  large  proportion  of  American  exporting  manufacturers 
have  given  careful  study  to  the  subject  of  foreign  credits. 

2.  With  a  growing  tendency  to  deal  direct  with  the  foreign 
customers  and  an  increased  familiarity  with  foreign  conditions, 
many  American  manufacturers  have  been  granting  reasonable 
credit  accommodations  to  customers  in  many  countries. 

3.  The  major  portion  of  American  manufacturers  willing 
to  grant  credit  abroad  are  wisely  in  favor  of  restricted  credit 
terms,  sufficient  to  allow  the  customer  to  receive  his  goods,  ex- 
amine them,  and  place  them  in  stock.  The  advisability  of  grant- 
ing unduly  long  credits  is  doubted,  for  the  length  of  credit 
as  selling  argument  is  apt  to  appeal  to  the  least  desirable  class 
of  customers. 

4.  American  manufacturers,  in  spite  of  the  disadvantages 
of  the  American  banking  system  pointed  out,  nevertheless  do  not 
seriously  suffer  from  any  disability  either  in  discounting  their 
bills  on  foreign  points  or  in  having  them  collected  on  reasonable 
terms. 

5.  Nevertheless  the  entire  system  of  financing  American 
export  shipments,  as  distinct  from  the  question  of  discounting 
of  individual  drafts  by  manufacturers  of  standing,  suffers  in 
comparison  with  the  German  and  British  methods  with  regard 
to  elasticity  and  scope,  making  it  impossible  for  American  manu- 
facturers to  undertake  the  financing  of  foreign  accounts  on  so 


*)  This  condition  lias  been  largely  remedied  since  1914,  as  described 
in  the  next  Chapter. 


FORMER  AMERICAN  METHODS  377 

large  a  scale  as  is  clone  by  German  and  British  export  merchants 
(and  to  a  lesser  degree  by  German  and  British  manufacturers), 
as  the  banks  under  American  conditions  (lack  of  open  discount 
market  and  bank  acceptances)  can  not  co-operate  with  them  to 
the  same  extent  as  the  German  and  British  banks  co-operate 
with  the  export  merchants  and  manufacturers  of  Germany  and 
England.  The  lack  of  rediscounting  facilities  necessarily  restricts 
the  service  of  American  banks  in  this  respect*). 

6.  The  old-time  rigid  policy  of  "cash  against  documents" 
at  the  port  of  shipment  is  being  more  and  more  retired  in  favor 
of  a  rational  liberality,  and  is  now  restricted  mostly  to  novices 
in  the  export  trade,  manufacturers  without  a  foreign  sales  organ- 
ization, and  occasional  exporters,  or  else  applies  to  certain  lines 
which  are  by  trade  usage  cash  lines. 


*)  This  paragraph  as  quoted  refers  to  conditions  which  have  been 
largely  remedied  since  the  enactment  of  the  Federal  Reserve  Act,  as  des- 
cribed in  the  next  Chapter. 


CHAPTER  XVI. 

D.    The  American  Banks  and  their  Service  to  Exporters 
Since  the  Enactment  of  the  Federal  Reserve  Act. 

i.  the  federal  reserve  system  as  affecting  the  financing 
of  foreign  shipments. 

The  Federal  Reserve  Act  was  approved  December  23,  191 3. 
It  was  entitled  "An  Act  to  provide  for  the  establishment  of 
Federal  Reserve  Banks,  to  furnish  an  elastic  currency,  to  afford 
means  of  re-discounting  commercial  paper,  to  establish  a  more 
effective  supervision  of  banking  in  the  United  States,  and  for 
other  purposes."  It  has  been  revised  and  amended  on  several 
occasions,  the  last  being  on  March  3,  1919.  The  act  authorized 
the  Secretary  of  the  Treasury,  the  Secretary  of  Agriculture  and 
the  Comptroller  of  the  Currency,  acting  as  "The  Reserve  Bank 
Organization  Committee"  to  designate  not  less  than  eight,  nor 
more  than  twelve  Federal  reserve  cities,  having  divided  the  con- 
tinental United  States  and  Alaska  into  as  many  districts.  A 
Federal  Reserve  Bank  was  to  be  organized  in  each  of  these 
cities.  At  the  present  time  the  organization  is  as  follows :  Dis- 
trict No.  1,  Boston;  No.  2,  New  York;  No.  3,  Philadelphia; 
No.  4,  Cleveland  (branches  at  Pittsburgh  and  Cincinnati)  ; 
No.  5,  Richmond  (branch  at  Baltimore)  ;  No.  6,  Atlanta 
(branches  at  New  Orleans,  Birmingham,  Jacksonville)  ;  No.  7, 
Chicago  (branch  at  Detroit)  ;  No.  8,  St.  Louis  (branches  at 
Louisville,  Memphis,  Little  Rock)  ;  No.  9,  Minneapolis;  No.  10, 
Kansas  City  (branches  at  Denver,  Omaha)  ;  No.  11,  Dallas 
(branch  at  El  Paso)  ;  No.  12,  San  Francisco  (branches  at  Port- 
land, Seattle,  Spokane,  Salt  Lake  City).  The  ruling  body  is  the 
Federal  Reserve  Board,  with  the  Secretary  of  the  Treasury 
and  the  Comptroller  of  the  Currency  as  ex-officio  members,  a 
Governor,  a  vice  governor,  two  members  at  large,  a  secretary, 


FEDERAL  RESERVE  ACT  3T8 

two  assistant  secretaries,  fiscal  agent,  statistician,  general  counsel, 
director  of  the  division  of  analysis  and  research  and  director 
of  the  division  of  foreign  exchange. 

There  is  also  a  Federal  Advisory  Council  with  a  member 
in  each  of  the  12  districts.  Every  national  banking  association 
or  national  bank  in  each  district  was  required  and  every  eligible 
bank  and  trust  company  was  authorized  to  subscribe  to  the  Fed- 
eral Reserve  Bank  in  its  district  a  sum  equal  to  6%  its  paid-up 
capital  stock  and  surplus. 

Section  13  of  the  Act,  as  variously  amended  and  here  quoted 
in  extract,  thus  describes  the  powers  of  Federal  Reserve  Banks : 

Sec.  13.  Any  Federal  reserve  bank  may  receive  from  any 
of  its  member  banks,  and  from  the  United  States  deposits  of 
current  funds  in  lawful  money,  national  bank  notes,  Federal  re- 
serve notes,  or  checks,  and  drafts,  payable  upon  presentation, 
and  also,  for  collection,  maturing  notes  and  bills ;  or  solely  for 
purposes  of  exchange  or  of  collection,  may  receive  from  other 
Federal  reserve  banks  deposits  of  current  funds  in  lawful 
money,  national  bank  notes,  or  checks  upon  other  Federal  reserve 
banks,  and  checks  and  drafts,  payable  upon  presentation  within 
its  district,  and  maturing  notes  and  bills  payable  within  its  dis 
trict;  or,  solely  for  the  purposes  of  exchange  or  of  collection, 
may  receive  from  any  non-member  bank  or  trust  company  tie- 
posits  of  current  funds  in  lawful  money,  national-bank  notes, 
Federal  reserve  notes,  checks  and  drafts  payable  upon  presenta- 
tion, or  maturing  notes  and  bills :  Provided,  Such  non-member 
bank  or  trust  company  maintains  with  the  Federal  reserve  bank 
of  its  district  a  balance  sufficient  to  offset  the  items  in  transit 
held  for  its  account  by  the  Federal  reserve  bank :  Provided,  fur- 
ther, That  nothing  in  this  or  any  other  section  of  this  act  shall 
be  construed  as  prohibiting  a  member  or  non-member  bank  from 
making  reasonable  charges,  to  be  determined  and  regulated  by 
the  Federal  Reserve  Board,  but  in  no  case  to  exceed  10  cents 
per  $100  or  fraction  thereof,  based  on  the  total  of  checks  and 
drafts  presented  at  any  one  time,  for  collection  or  payment  of 
checks  and  drafts  and  remission  thereof  by  exchange  or  other- 
wise ?'  but  no  such  charges  shall  be  made  against  the  Federal 
reserve  banks. 


380  INTERNATIONAL  COMMERCE 

Upon  the  indorsement  of  any  of  its  member  banks,  which 
shall  be  deemed  a  waiver  of  demand,  notice  and  protest  by  such 
bank  as  to  its  own  indorsement  exclusively,  any  Federal  re- 
serve bank  may  discount  notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions ;  that  is,  notes, 
drafts,  and  bills  of  exchange  issued  or  drawn  for  agricultural, 
industrial,  or  commercial  purposes,  or  the  proceeds  of  which 
have  been  used,  or  are  to  be  used  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or  define  the  char- 
acter of  the  paper  thus  eligible  for  discount,  within  the  meaning 
of  this  Act.  Nothing  in  this  Act  contained  shall  be  construed 
to  prohibit  such  notes,  drafts,  and  bills  of  exchange,  secured  by 
staple  agricultural  products,  or  other  goods,  wares,  or  merchan- 
dise from  being  eligible  for  such  discount;  but  such  definition 
shall  not  include  notes,  drafts,  or  bills  covering  merely  invest- 
ments or  issued  or  drawn  for  the  purpose  of  carrying  or  trad- 
ing in  stocks,  bonds,  or  other  investment  securities,  except  bonds 
and  notes  of  the  Government  of  the  United  States*). 

The  aggregate  of  such  notes,  drafts,  and  bills  bearing  the 
signature  or  indorsement  of  any  one  borrower,  whether  a  per- 
son, company,  firm,  or  corporation,  rediscounted  for  any  one 
bank  shall  at  no  time  exceed  ten  per  centum  of  the  unimpaired 
capital  and  surplus  of  said  bank;  but  this  restriction  shall  not 
apply  to  the  discount  of  bills  of  exchange  drawn  in  good  faith 
against  actually  existing  values.**) 

Any  Federal  reserve  bank  may  discount  acceptances  of  the 
kinds  hereinafter  described,  which  have  a  maturity  at  the  time 
of  discount  of  not  more  than  three  months'  sight,  exclusive  of 
days  of  grace,  and  which  are  indorsed  by  at  least  one  member 
bank. 

Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  having  not  more  than  six  months'  sight  to  run, 
exclusive  of  days  of  grace,  which  grow  out  of  transactions  in- 


*)    Or  bonds  of  the  War  Finance   Corporation.     See   act   approved 
Apr.  5,  1918. 

**)  Amended  by  section  11  (m),  as  amended  March  3,  1919. 


FEDERAL  RESERVE  ACT  381 

volving  the  importation  or  exportation  of  goods;  or  which  grow 
out  of  transactions  involving  the  domestic  shipment  of  goods 
provided  shipping  documents  conveying  or  securing  title  are  at- 
tached at  the  time  of  acceptance;  or  which  are  secured  at  the 
time  of  acceptance  by  a  warehouse  receipt  or  other  such  docu- 
ment conveying  or  securing  title  covering  readily  marketable 
staples.  No  member  bank  shall  accept,  whether  in  a  foreign  or 
domestic  transaction,  for  any  one  person,  company,  firm,  or  cor- 
poration to  an  amount  equal  at  any  time  in  the  aggregate  to 
more  than  ten  per  centum  of  its  paid-up  and  unimpaired  capital 
stock  and  surplus,  unless  the  bank  is  secured  either  by  attached 
documents  or  by  some  other  actual  security  growing  out  of  the 
same  transaction  as  the  acceptance;  and  no  bank  shall  accept 
such  bills  to  an  amount  equal  at  any  time  in  the  aggregate  to 
more  than  one-half  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus:  Provided,  hozvever,  That  the  Federal  Reserve 
Board,  under  such  general  regulations  as  it  may  prescribe,  which 
shall  apply  to  all  banks  alike  regardless  of  the  amount  of  capital 
stock  and  surplus,  may  authorize  any  member  bank  to  accept 
such  bills  to  an  amount  not  exceeding  at  any  time  in  the  ag- 
gregate one  hundred  per  centum  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus :  Provided,  however,  That  the  aggregate 
of  acceptances  growing  out  of  domestic  transactions  shall  in  no 
event  exceed  fifty  per  centum  of  such  capital  stock  and  surplus. 

Any  Federal  reserve  bank  may  make  advances  to  its  mem- 
ber banks  on  their  promissory  notes  for  a  period  not  exceeding 
fifteen  days  at  rates  to  be  established  by  such  Federal  reserve 
banks,  subject  to  the  review  and  determination  of  the  Federal 
Reserve  Board,  provided  such  promissory  notes  are  secured  by 
such  notes,  drafts,  bills  of  exchange,  or  bankers'  acceptances  as 
are  eligible  for  rediscount  or  for  purchase  by  Federal  reserve 
banks  under  the  provisions  of  this  Act,  or  by  the  deposit  or 
pledge  of  bonds  or  notes  of  the  United  States. 

Section  fifty-two  hundred  and  two  of  the  Revised  Statutes 
of  the  United  States  is  hereby  amended  so  as  to  read  as  follows : 
"No  national  banking  association  shall  at  any  time  be  indebted, 
or  in  any  way  liable,  to  an  amount  exceeding  the  amount  of  its 
capital  stock  at  such  time  actually  paid  in  and  remaining  un- 


382  INTERNATIONAL  COMMERCE 

diminished  by  losses  or  otherwise,  except  on  account  of  demand* 
of  the  nature  following : 

First.     Notes  of  circulation. 

Second.  Money  deposited  with  or  collected  by  the  asso- 
ciation. 

Third.  Bills  of  exchange  or  drafts  drawn  against  money 
actually  on  deposit  to  the  credit  of  the  association,  or  due  there- 
to. 

Fourth.  Liabilities  to  the  stockohlders  of  the  association 
for  dividends  and  reserve  profits. 

Fifth.  Liabilities  incurred  under  the  provisions  of  the  Fed- 
eral Reserve  Act. 

The  discount  and  rediscount  and  the  purchase  and  sale  by 
any  Federal  reserve  bank  of  any  bills  receivable  and  of  do- 
mestic and  foreign  bills  of  exchange,  and  of  acceptances  author- 
ized by  this  Act,  shall  be  subject  to  such  restrictions,  limitations, 
and  regulations  as  may  be  imposed  by  the  Federal  Reserve 
Board. 

Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  having  not  more  than  three  months'  sight  to  run, 
exclusive  of  days  of  grace,  drawn  under  regulations  to  be  pre- 
scribed by  the  Federal  Reserve  Board  by  banks  or  bankers  in 
foreign  countries  or  dependencies  or  insular  possessions  of  the 
United  States  for  the  purpose  of  furnishing  dollar  exchange  as 
required  by  the  usages  of  trade  in  the  respective  countries,  de- 
pendencies, or  insular  possessions.  Such  drafts  or  bills  may  be 
acquired  by  Federal  reserve  banks  in  such  amounts  and  subject 
to  such  regulations,  restrictions,  and  limitations  as  may  be  pre- 
scribed by  the  Federal  Reserve  Board :  Provided,  hozvever,  That 
no  member  bank  shall  accept  such  drafts  or  bills  of  exchange 
referred  to  this  paragraph  for  any  one  bank  to  an  amount  ex- 
ceeding in  the  aggregate  ten  per  centum  of  the  paid-up  and  un- 
impaired capital  and  surplus  of  the  accepting  bank  unless  the 
draft  or  bill  of  exchange  is  accompanied  by  documents  con- 
veying or  securing  title  or  by  some  other  adequate  security : 
Provided  further,  That  no  member  bank  shall  accept  such  drafts 


FEDEBAL  BESEEVE  BOAKD  3s;s 

or  bills  in  an  amount  exceeding  at  any  time  the  aggregate  of 
one-half  of  its  paid-up  and  unimpaired  capital  and  surplus. 

We  are  not  concerned  in  this  present  study  with  the  far- 
reaching  effects  of  the  Federal  Reserve  system  upon  the  eco- 
nomic life  of  the  nation  beyond  those  that  refer  strictly  to  in- 
ternational merchandizing  and  allied  matters.  These  effects  in- 
clude the  broadening  of  the  bank  acceptance  practice  and  the 
extension  of  re-discounting  facilities ;  the  increased  use  of  trade 
acceptances;  the  establishment  of  foreign  branches  of  American 
banks  abroad,  the  proposed  Federal  incorporation  of  banking 
companies  doing  a  strictly  foreign  business  and  the  relations  of 
the  Federal  Reserve  Banks  with  foreign  banks. 

Before  we  pass  to  a  detailed  consideration  of  the  bank  ac- 
ceptance technique  or  commercial  banking  practice  and  the.  ser- 
vice of  individual  banks,  whether  operating  foreign  branches  or 
not,  we  may  with  advantage  quote  from  the  Annual  Report  of 
the  Federal  Reserve  Board  for  1918  some  particularly  striking 
portions  bearing  on  the  effects  of  the  system  which  in  the  fore- 
going paragraph  we  mentioned  as  noteworthy  from  the  merchan- 
dizing point  of  view. 

In  this  connection  we  must  bear  in  mind  that  the  operations 
of  the  Federal  Reserve  system  almost  since  its  inception  have 
been  carried  on  during  abnormal  times,  the  war  in  Europe  be- 
fore the  American  intervention,  and  the  entry  of  the  United 
States  into  the  World  War.  The  discount  policy  of  the  Fed- 
eral Reserve  Board  has  necessarily  been  co-ordinated  with 
Treasury  requirements  and  policies  which  in  turn  have  been 
governed  during  the  past  two  years  by  demands  made  upon  the 
Treasury  for  war  purposes.  The  principal  acceptance  market 
has  been  and  will  be  naturally  in  New  York,  although  an  open 
market  for  acceptances  has  also  been  established  in  Boston.  The 
following  table  gives  the  interdistrict  movement  of  bills  dis- 
counted or  purchased  by  the  Federal  Reserve  Board  during  the 
period  from  January  1  to  December  31,  1918. 


384 


INTERNATIONAL  COMMERCE 


Interdistrict  movement  of  bills  discounted  or  purchased  by  Fed- 
eral Reserve  Banks  during  the  period  from  Jan.  i, 
to  Dec.  31,  1918. 


[I 

n  thousands 

of  dollars.] 

Federal  Reserve 

Rediscounts  and  sales  between 
Federal  Reserve  Banks. 

Acceptances 
purchased  for 

account  of 

other  Federal 

Reserve 

Banks. 

Direct 

purchases  of 

acceptances  in 

other  Federal 

Reserve 

districts. 

Interdistrict 

movement  of 

discounted  and 

l.urchased 

paper. 

Bank. 

Redis- 
count ed 
or  sold 
by- 

Dis- 
counted 
or  pur- 
chased 

by- 

Excess 
of  redis- 
counts 
and 
sales. 

Excess 
of  ac- 
counts 
and 
pur- 
chases. 

Amount 
pur- 
chased 
by- 

Amount 
pur- 
chased 
for  ac- 
count 
of— 

Market 

in 
which 
pur- 
chased. 

Pur- 
chasing 
bank. 

Excess 
move- 
ment 
from — 

Excess 
move- 
ment 
to— 

120,297 
180,901 
50,149 

19,898 

67,681 

66,365 

137,115 

331 

2.514 

200,398 

9,051 

99.462 

25,047 

8,242 

24,534 

100,399 
113,220 

68,732 
77,779 

3,449 
95,683 

1.907 

18,949 
65,628 

2,057 
41,411 

8,503 

21.397 

4,791 

92.046 
329,491 

6S.732 
77,722 

679 

16,216 
137,115 

174,860 

56,562 

207,534 

69.063 
80,293 

9.984 
12.500 
24,996 

8,530 
103,925 

57 
1.093 

190,414 

3,685 
2,770 
2,057 

195,192 

74,466 
16,517 

6,384 
11,047 

1,283 
68,512 

82,907 

27,564 

Dallas 

265 

94.135 

24,534 

93,046 

Total 

660,638 

660,638 

459,262 

459,262 

174,860 

174.S60 

43,468 

43,468 

662.S05 

662,805 

The  activities  of  the  Federal  Reserve  system  in  regard  to 
acceptances  are  thus  described  in  the  1918  Annual  Report: 


Acceptances. 

The  acceptance  is  a  comparatively  new  development  in 
American  finance.  A  few  of  the  States,  just  prior  to  the  pass- 
age of  the  Federal  Reserve  Act,  authorized  banks  and  trust 
companies  operating  under  State  charters  to  accept  bills  of  ex- 
change drawn  upon  them,  and  the  Federal  Reserve  Act  author- 
ized such  transactions  on  the  part  of  member  banks  where  the 
drafts  or  bills  have  not  more  than  six  months  to  run  and  where 
they  grow  out  of  transactions  involving  the  importation  or  ex- 
portation of  goods,  the  total  volume  of  such  acceptances  out- 
standing at  any  one  time  not  to  exceed  in  the  aggregate  one- 


ACCEPTANCES  385 

half  of  the  paid-up  capital  and  surplus  of  the  accepting  bank. 
The  Act  of  March  3,  19 15,  authorized  the  Federal  Reserve 
Board  to  discount  acceptances  in  a  total  amount  not  exceeding 
the  capital  and  surplus  of  the  accepting  bank,  and  the  act  of 
September  7,  1916,  authorized  member  banks  to  accept  drafts 
and  bills  growing  out  of  transactions  involving  domestic  ship- 
ments of  goods,  provided  shipping  documents  conveying  or  sec- 
uring title  are  attached  at  the  time  of  acceptance,  or  which  are 
secured  at  time  of  acceptance  by  warehouse  receipts  or  other 
similar  documents  conveying  or  securing  title,  covering  readily 
marketable  staples.  The  total  amount  of  domestic  bills  which 
may  be  accepted  by  a  member  bank  may  not  exceed  at  any  one 
time  in  the  aggregate  one-half  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus. 

The  Board  had  on  December  31,  1918,  authorized  161  mem- 
ber banks  to  accept  up  to  100  per  cent  of  their  capital  and  sur- 
plus. Purchases  of  acceptances  constituted  the  greater  part  of 
the  open-market  transactions  of  the  Federal  Reserve  Banks. 
Acceptances  bought  are  mainly  bankers'  acceptances,  although 
trade  acceptances,  which  are  drafts  drawn  by  the  seller  upon  the 
purchaser  of  goods  and  which  may  be  either  foreign  or  do- 
mestic in  their  character,  are  now  being  acquired  in  increasing 
volume,  in  some  districts  the  aggregate  of  trade  acceptances  be- 
ing 5  per  cent  or  more  of  the  total  acceptance  holdings,  the  total 
for  the  system  being  slightly  more  than  3  per  cent. 

Trade  acceptances  are  discounted  more  freely  upon  the  in- 
dorsement of  member  banks,  and  a  differential  of  one-fourth 
of  1  per  cent  is  usually  in  favor  of  these  acceptances  as  against 
promissory  notes. 

The  following  tabular  statement  of  acceptances  bought  in 
the  open  market  by  the  Federal  Reserve  Banks  during  the  past 
four  years  shows  the  large  increase  in  the  volume  of  the  ac- 
ceptance business : 


386 


INTERNATIONAL  COMMERCE 


Acceptances  bought  in  open  market  by  Federal 
Reserve  Banks. 

[In  thousands  of  dollars ;  i.  c,  000  omitted.] 


Bought  in  open  market- 

Purchased  from 
other  Federal 
reserve  banks. 

1915 

1916 

1917 

1918 

1917 

1918 

Boston 

14,105 

25,834 

7,565 

2.963 

250 

72 

5.782 

1,801 

1.455 

1,788 

52,377 

123,406 

53.122 

27,512 

11.313 

12,544 

27,061 

20,681 

13,539 

8,191 

3,543 

32,776 

86,481 
445,307 
70,710 
51,007 
54,759 
25,388 
61,142 
22,788 
16,397 
17,561 
9,743 
48,018 

194,158 

945,498 
77.686 

122,800 
70,766 
45,477 

122,787 
26,096 
13,903 
14.691 
25,024 

150,653 

5,047 

19,659 

15,204 

40,102 

3,357 

1,005 

5.572 

6,944 

16,675 

9,264 

25,333 

20,249 

6.709 

New  York 

50,182 

Philadelphia 

42,321 

Cleveland 

54,199 

331 

2,514 

100.077 

St.  Louis 

4,551 

Minneapolis 

25,911 

19,047 

Dallas 

8,242 

3,230 

22,506 

Total 

64.845 

386,095 

909,301 

1,809,539 

168,411 

336,590 

Bankers'  acceptances  are  regarded  as  the  most  liquid  of  all 
investments,  and  it  has  always  been  the  policy  of  the  Board  to 
permit  a  substantial  differential  in  their  favor.  The  rates  on 
acceptances  are  subject  to  fluctuations,  reflecting  accurately  the 
varying  conditions  of  the  money  market,  and  consequently  the 
Board  has  never  fixed  a  definite  rate  for  them  but  has  prescribed 
maximum  and  minimum  rates  within  the  limitations  of  which 
the  Federal  Reserve  Banks  are  permitted  to  purchase  bills. 

In  191 5  Federal  Reserve  Bank  acceptance  rates  ranged  be- 
tween 2  and  3  per  cent,  and  at  the  present  time  the  minimum 
rate  is  4  per  cent. 

The  private  rate  in  London  has  for  the  past  nine  months 
been  about  3V2  per  cent  against  average  current  rates  in  New 
York  of  41/4  per  cent.  While  this  difference  may  have  diverted 
some  business  to  the  English  banks,  the  Board  has  not  as  yet 
deemed  it  advisable  for  the  Federal  Reserve  Banks  to  meet  the 
British  rate,  because  of  the  large  financial  operations  of  the 
Treasury,  and  for  other  reasons  which  are  stated  below.  It  was 
thought  that  a  lower  rate  for  any  class  of  paper  than  that  borne 
by  member  banks'  15-day  collateral  notes  secured  by  Govern- 


BANKEKS'  ACCEPTANCES  387 

ment    obligations    might  have    an  unfavorable    effect    upon    the 
Treasury's  operations. 

The  British  rate  of  3%  per  cent,  however,  has  been  main- 
tained for  nearly  a  year,  despite  the  fact  that  London  banks  have 
been  paying  3  per  cent  interest  on  domestic  balances  and  4V2 
per  cent  interest  on  foreign  balances,  while  the  British  Govern- 
ment is  paying  5  per  cent  on  loans  made  to  it  by  the  United 
States  Government.  The  report  of  the  British  Committee  on 
Currency  and  Foreign  Exchanges,  dated  August  18,  19 18,  how- 
ever, indicates  the  possibility  of  an  advance  in  the  British  dis- 
count rate  on  acceptances.  As  no  reduction  in  the  rate  for  paper 
secured  by  Government  obligations  is  contemplated  by  the  Board, 
a  lower  acceptance  rate  at  Federal  Reserve  Banks  would  have 
a  tendency  to  reduce  the  proportion  of  bond-secured  paper  held 
by  them,  and  to  bring  about  a  corresponding  increase  in  their 
proportion  of  commercial  paper  holdings. 

In  considering  rates  of  discount  for  bankers'  acceptances  in 
the  United  States,  certain  fundamental  differences  between  the 
London  and  the  New  York  money  markets  must  be  kept  in  mind. 
In  London  there  is  an  official  rate  fixed  by  the  Bank  of  Eng- 
land, known  as  the  bank  rate,  and  there  is  also  an  open-market 
or  private  rate.  The  bank  rate  is  the  rate  at  which  the  Bank 
of  England  will  buy  approved  bills  of  exchange  in  the  London 
market.  The  bank  will  not  buy  the  acceptances  of  foreign  banks 
domiciled  in  London  nor  of  foreign  agencies  established  in 
London. 

The  London  market  can  avail  itself  of  the  rate  established 
by  the  Bank  of  England,  which  is  prepared  at  all  times  to  absorb 
bills  at  its  prevailing  discount  rate.  The  bank  itself,  whenever 
it  seems  desirable,  operates  in  the  market,  absorbing  funds  when 
it  wishes  to  maintain  or  advance  the  rate,  and  whenever  it 
wishes  to  ease  the  market  the  bank  takes  an  active  instead  of  a 
passive  part  in  the  purchase  of  bills  of  exchange.  The  Bank 
of  England  rate  is  usually  higher  than  the  private  rate,  which 
is  governed  by  the  demand  for  and  supply  of  bills  of  exchange. 
The  supply  is  represented  largely  by  bills  drawn  for  the  purpose 
of  carrying  on  international  commerce  in  the  form  of  60  and 
90  days'   sight  acceptnces  drawn   upon  English   banks  and  ac- 


388  INTERNATIONAL  COMMERCE 

ceptance  houses.  The  demand  in  the  open  market  comes  mainly 
from  the  joint-stock  banks,  private  banks,  and  discount  compa- 
nies, and  represents  accumulated  funds  whose  use  in  other 
channels  is  not  expected  to  develop  for  some  time — say,  30,  60, 
or  90  days  and  sometimes  for  longer  periods.  Bills  of  exchange 
available  for  discount  with  the  Bank  of  England  are  purchased 
by  these  institutions  with  the  knowledge  that  they  can  always 
be  disposed  of  at  the  bank  on  the  day  of  sale,  and  this  knowl- 
edge gives  such  elasticity  to  investments  in  bills  of  exchange 
that  purchases  are  made  freely  from  moneys  temporarily  idle, 
and  a  large  portion  of  the  resources  of  the  purchasing  institu- 
tion is  carried  in  the  shape  of  bills  purchased  at  the  open-mar- 
ket rate  which  are  discountable  at  the  Bank  of  England.  Should 
a  feeling  arise  in  the  course  of  market  operations  that  the  Bank 
of  England  is  likely  to  raise  its  rate,  which  is  usually  done  in 
gradations  of  one-half  of  1  per  cent  to  1  per  cent,  that  open- 
market  rate,  or  private  rate,  will  rise  in  anticipation  of  the 
change,  above  the  official  bank  rate.  During  a  period  when  the 
bank  rate  seems  to  have  been  established  at  a  definite  figure  and 
when  no  changes  are  anticipated,  the  tendency  of  the  private 
rate  is  to  drop  below  the  bank  rate  and  to  continue  there.  Bank- 
ers and  discount  houses  purchasing  bills  of  exchange  at  the 
private  rate  know  that  in  any  event  they  can  sell  their  bills  at 
the  bank  rate,  and  if  this  rate  holds  fairly  steady  they  have  an 
opportunity  to  earn  the  full  interest  obtainable  on  bills  purchased 
for  such  time  as  they  may  be  held.  Furthermore,  purchasers 
know  that  if  the  bills  are  carried  for  a  considerable  portion  of 
the  time  they  have  to  run  and  then  must  be  sold  at  the  bank  rate, 
there  will  be  a  profit  on  the  investment  for  the  time  the  bills  are 
carried  even  though  sold  at  the  higher  bank  rate. 

The  accumulation  of  funds  in  London  from  all  parts  of  the 
world  has  been  invested  to  a  large  extent  in  bills  of  exchange 
for  many  years.  Experience,  demonstrating  the  safety  of  these 
investments,  has  given  great  elasticity  to  the  operations  and  has 
made  the  open  discount  market  in  London  for  bills  of  exchange 
so  broad  that  large  transactions  are  carried  on  without  notice- 
able effect  upon  the  money  market.  It  is  therefore  natural  that 
during  periods  of  steady  money  rates  the  private  rate  should 
rule  below  the  bank  rate. 


BTEBLING  BILLS  389 

Before  the  war,  time  bills  of  exchange  were  drawn  upon 
London  covering  exports  and  imports  between  England  and 
other  countries  and  between  foreign  countries,  all  of  which 
created  a  vast  turnover,  which  the  English  money  market  was 
able  to  absorb  because  of  the  accumulation  of  funds  in  London 
available  for  such  investments.  During  the  war,  owing  to  sev- 
eral causes,  sterling  bills  of  exchange  were  not  created  in  nearly 
so  large  a  volume.  One  reason  for  this  is  that  the  United  States 
Government  was  making  loans  in  dollars  to  Great  Britain, 
Earnce,  and  Italy  to  provide  for  purchases  by  thes  nations  in 
the  United  States,  and  another  is  that  purchases  made  by  these 
nations  in  the  United  States  include  raw  materials  which  have 
been  imported  into  the  United  States  to  be  used  in  the  manu- 
facture of  goods  for  the  allied  powers  which  otherwise  might 
have  been  imported  direct  by  those  nations.  This  applies  par- 
ticularly to  food,  clothing,  and  munitions.  As  a  result,  the 
British  money  market  is,  or  has  been  until  recently,  rather  bare 
of  bills  of  exchange.  Funds  available  in  London  for  use  in 
the  open  market  are  probably  greater  now  than  in  normal  times, 
as  there  has  been  an  accumulation  due  to  the  fact  that  foreign 
exchanges  have  generally  ruled  against  Great  Britain,  which 
has  made  the  withdrawal  of  sterling  balances  by  foreign  na- 
tions difficult  and  expensive.  Even  though  the  bank  rate  has 
been  maintained  at  5  per  cent,  the  private  rate  has  naturally 
fallen  below  this  figure  and  has  ruled  around  3V2  per  cent. 
The  cost  of  converting  sterling  balance  into  balances  in  other 
countries  where  a  higher  interest  rate  might  be  obtained,  added 
to  the  increased  risks  of  such  conversion  due  to  the  war,  has 
operated  to  prevent  transfers  from  the  London  market  which 
otherwise  might  have  been  made. 

At  the  beginning  of  the  war  in  1914  the  creation  of  sterling 
bills  of  exchange  in  all  parts  of  the  world  was  stopped  for  the 
time  being,  and  as  a  result  there  was  a  very  large  amount  of 
unloanable  funds  in  the  London  open-money  market.  The  Lon- 
don joint-stock  banks  were  obliged  to  lower  the  rate  of  interest 
which  they  paid  upon  balance  to  a  point  below  the  normal  dif- 
ference of  1V2  per  cent  off  the  bank  rate.  After  a  third  mo 
ratorium  proclamation,  which  re-established  the  credit  of  British 
institutions  all  over  the  world,  the  drawing  of  time  sterling  bills 


390  INTERNATIONAL  COMMERCE 

was  resumed  on  a  large  scale,  and  as  a  result  London  money 
rates  went  above  6  per  cent.  After  the  United  States  came  into 
the  war  the  creation  of  sterling  bills  fell  off  rapidly  for  reasons 
already  stated,  which  resulted  in  bringing  the  British  money 
market  into  the  position  outlined. 

In  New  York,  which  at  the  present  time  is  the  only  city  in 
the  United  States  which  has  anything  like  a  broad  acceptance 
market,  the  rate  established  by  the  Federal  Reserve  Bank  is  fol- 
lowed closely  by  the  outside  market,  because  there  are  not  ordi- 
narily sufficient  funds  available  in  New  York  open  market  to 
absorb  acceptances  offered,  and  consequently  there  is  no  tend- 
ency for  the  outside  rate  to  go  below  the  Federal  Reserve  Bank 
rate.  Should  there  be  a  period  of  very  easy  money,  it  is  prob- 
able that  the  outside  rate  in  New  York  would  fall  somewhat 
below  the  Federal  Reserve  Bank  rate.  This  will  transpire  when- 
ever bankers  feel  that  they  can  hold  bills  until  maturity  without 
being  obliged  to  transfer  them  to  the  Federal  Reserve  Bank 
during  the  life  of  the  bills. 

With  the  present  restrictions  upon  foreign  trade  and  with- 
out free  shipments  of  gold  between  Great  Britain  and  the  United 
States,  the  New  York  and  London  money  markets  stand  each 
upon  its  own  bottom  and  are  not  subject  to  the  ordinary  leveling 
process  usual  in  normal  times.  This  being  true,  the  Federal  Re- 
serve Board  has  felt  justified  in  basing  the  rates  of  the  Federal 
Reserve  Banks  upon  our  own  money-market  conditions  instead 
of  considering  them  in  the  light  of  market  conditions  abroad, 
as  may  become  necessary  upon  the  restoration  of  normal  con- 
ditions. The  problem  of  establishing  discount  rates  for  accept- 
ances throught  the  Federal  Reserve  Bank  in  New  York  since 
the  United  States  entered  the  war  has,  consequently,  been  en- 
tirely free  from  any  consideration  of  the  English  rate.  It  should 
be  borne  in  mind  also  that  our  acceptance  rate  is  applied  to  bills 
of  exchange  drawn  upon  banking  institutions  authorized  by  law 
to  accept  time  bills  under  certain  restrictions.  Our  law  provides 
for  domestic  acceptances  only  to  a  limited  extent  (50  per  cent 
of  the  capital  and  surplus  of  the  accepting  bank)  and  was 
framed  especially  to  promote  our  foreign  trade. 

During  the  war  we  were  obliged  to  import  on  balance  a 
very  large  volume  from  many  countries,  and  it  was  necessary 


AMERICAN  ACCEPTANCE  MARKET  391 

to  afford  every  possible  facility  to  aid  in  the  financing  of  such 
imports.  Too  high  an  acceptance  rate  would  naturally  have 
caused  more  or  less  uneasiness  in  the  countries  called  upon  to 
make  advances  against  their  exports  to  us,  as  the  impression 
might  have  prevailed  that  we  were  pressed  for  funds.  Prevail- 
ing rates  of  from  4  to  4^  per  cent,  therefore,  have  seemed  to 
be  entirely  natural.  When  a  normal  basis  of  trade  is  again  es- 
tablished between  the  principal  countries  of  the  world,  the 
ability  of  this  country  to  uphold  the  dollar  in  foreign  markets 
will  lie  partly  in  the  judgment  displayed  in  adjusting  our  accept- 
ance and  bank  rates.  By  that  time,  however,  the  English  money 
market,  as  well  as  our  own,  will  have  resumed  a  more  normal 
condition,  so  that  the  tendency  in  world  currents  of  trade  will 
be  more  clearly  marked.  The  flow  of  money  will  be  more  notice- 
able and  rates  will  have  a  greater  tendency  to  establish  them- 
selves more  automatically  outside  of  the  Federal  Reserve  System, 
thereby  furnishing  a  surer  basis  for  rate  movement  in  the  sys- 
tem. 

In  the  development  of  the  American  acceptance  market  it 
is  necessary  to  provide  not  only  an  outlet  for  acceptances  but 
means  of  securing  acceptances  of  bills  in  adequate  volume,  and 
in  order  to  enable  American  banks  and  bankers  to  compete  with 
British  banking  houses  in  financing  the  world's  trade  the  com- 
bined power  of  American  institutions  whose  acceptances  can  be 
made  available  in  foreign  markets  to  accept  time  bills  must  be 
large  enough  to  meet  all  requirements,  for  otherwise  should  im- 
porters find  that  it  is  only  occasionally  that  they  can  obtain  dollar 
acceptance  credits  from  American  banks,  due  to  the  fact  that 
these  banks  have  reached  the  limit  of  acceptance  liabilities  pro- 
vided by  law,  the  importers  will  naturally  return  to  the  sterling 
acceptances  which  are  available  at  all  times  in  sufficient  amounts 
to  meet  the  demand. 

In  order  to  provide  additional  facilities  for  engaging  in  for- 
eign transactions,  it  has  been  suggested  to  the  Board  that  it  may 
become  advisable  to  amend  section  13  of  the  act  so  as  to  permit 
the  Federal  Reserve  Board  to  authorize  any  member  bank  hav- 
ing a  combined  capital  and  surplus  of  not  less  than  $1,000,000 
to  accept  draft  or  bills  of  exchange  drawn  upon  it  having  not 


392  INTERNATIONAL  COMMERCE 

more  than  six  months'  sight  to  run,  exclusive  of  days  of  grace, 
which  grow  out  of  transactions  involving  the  importation  or 
exportation  of  goods,  to  an  amount  not  exceeding  200  per  cent 
of  its  capital  and  surplus,  provided  that  no  bank  shall  be  per- 
mitted to  accept  for  domestic  transactions  in  an  amount  greater 
than  50  per  cent  of  its  capital  and  surplus  or  more  than  50  per 
cent  of  its  capital  and  surplus  for  the  purpose  of  furnishing 
dollar  exchange,  but  that  any  part  of  the  aggregate  amount 
which  a  bank  may  be  authorized  to  accept  may  be  used  in  ac- 
cepting drafts  or  bills  of  exchange  growing  out  of  transactions 
involving  the  importation  or  exportation  of  goods. 

By  limiting  the  authority  to  accept  in  the  larger  amount 
proposed,  to  foreign  transactions,  there  would  be  no  possibility 
of  the  added  acceptance  privilege  being  used  for  the  expansion 
of  domestic  credits,  and  the  aggregate  amount  of  acceptances 
outstanding  would  be  controlled  by  our  foreign  trade  require- 
ments. 

The  Relations  of  the  Federal  Reserve  Board  with 
Foreign  Banks. 

Of  considerable  interest  is  the  outline  of  the  relations  es- 
tablished by  the  Federal  Reserve  Bank  of  New  York  with  for- 
eign banks  or  government  as  shown  in  the  following  notes : 

Bank  of  England. — This  is  an  arrangement  of  a  formal 
character,  covered  by  written  agreement,  ratified  by  the  directors 
of  the  two  institutions,  covering  in  detail  the  basis  of  the  prin- 
cipal operations  and  making  a  close,  effective,  and  complete 
agency.  The  business  thus  far  transacted  has  been  very  limited, 
but  under  the  agreement  can  be  extended  whenever  the  need 
arises.  In  June,  1917,  the  Federal  Reserve  Bank  of  New  York, 
acting  for  itself  and  other  Federal  Reserve  Banks,  paid  for  ac- 
count of  certain  English  banks  a  loan  of  $52,500,000  with  in- 
terest, maturing  in  New  York,  and  accepted  in  return  earmarked 
sovereigns  of  equivalent  value  in  the  Bank  of  England.  During 
1918  all  but  a  small  amount  of  this  gold  was  either  shipped  to 
New  York  or  furnished  to  the  Treasury  Department  for  the 
use  of  the  United  States  Government  or  its  allies  in  Europe. 

Bank  of  France. — A  somewhat  limited  agreement  has  been 


FEDERAL  RESERVE  AND  FOREIGN  BANKS        39^ 

effected  with  the  Bank  of  France  which  it  is  hoped  and  expected 
by  both  institutions  will  soon  ripen  into  a  closer  relationship. 

Bank  of  Italy. — A  mutual  arrangement  has  been  entered  in- 
to between  this  institution  and  the  Federal  Reserve  Bank  of 
Xew  York,  whereby  each  has  appointed  the  other  its  corres- 
pondent. No  business  has  been  or  is  likely  to  be  transacted  be- 
tween the  two  institutions  as  long  as  arrangements  for  dealing 
with  exchange  problems  growing  out  of  the  war  are  dealt  with 
by  the  (iovernments  of  the  two  nations. 

Bank  of  Japan. — Mutual  arrangements,  similar  to  those  es- 
tablished with  the  Bank  of  Italy,  have  been  concluded  with  the 
Bank  of  Japan,  and  although  no  active  business  has  yet  been 
transacted,  it  is  hoped  that,  as  in  the  case  of  other  foreign  agents 
and  correspondents,  a  more  active  relationship  will  develop 
when  international  commerce  resumes  its  natural  course. 

Philippine  National  Bank. — In  May,  1017,  mutual  agency 
appointments  were  effected  between  the  Philippine  National 
Bank  and  this  bank,  but  as  the  former  has  an  active  branch  of 
its  own  in  New  York,  the  relationship,  while  ready  for  opera- 
tions at  any  time,  is  likely  to  be  largely  of  an  emergency  char- 
acter. 

Dc  N ederlandsche  Bank. — During  1918,  at  the  request  of 
the  Treasury  Department,  this  bank  opened  a  current  account 
with  de  Nederlandsche  Bank  for  the  purpose  of  receiving  there- 
in, for  the  use  of  the  Treasury  Department,  the  proceeds  in 
guilders  of  wheat  and  other  commodities. 

Sverigcs  Riksbank  and  Norges  Bank. — During  1918  ac- 
counts were  also  opened  with  the  Sveriges  Riksbank  of  Stock- 
holm and  the  Norges  Bank  of  Christiania  for  purposes  analogous 
to  those  mentioned  in  the  foregoing  paragraph. 

Argentina. — Early  in  1918  an  important  arrangement  was 
entered  into  between  the  United  States  and  the  Argentine  Gov- 
ernments whereby  the  Federal  Reserve  Bank  of  New  York  anil 
the  Banco  de  la  Nacion  appointed  each  other  as  correspondents, 
and  the  former  undertook  to  receive  deposits  not  exceedin;; 
$100,000,000  exportable  in  gold  coin  after  the  proclamation  of 
peace  and  the  deposit  of  over  $16,000,000  of  gold  coin  then  on 
deposit,  earmarked,  in  New  York  and  since  then  withdrawn  and 
exported.     The  purpose  of  this  agreement,   which  has   proved 


394  INTERNATIONAL  COMMERCE 

successful  in  operation,  was  to  stabilize  the  badly  demoralized 
exchange  situation  between  the  two  countries. 

Bolivia. — A  somewhat  similar  agreement  has  been  entered 
into  between  the  Governments  of  the  United  States  and  of 
Bolivia  whereby  this  bank  agrees  to  receive  not  exceeding  $5,- 
000,000  on  deposit  which  may  be  exported  in  gold  six  months 
after  the  proclamation  of  peace. 

Peru. — Another  similar  agreement  for  the  stabilizing  of  ex- 
change has  been  entered  into  between  the  Governments  of  the 
United  States  and  of  Peru  with  this  bank  as  banker,  and  with 
a  maximum  of  $15,000,000  to  be  received  on  deposit  subject  to 
export  at  the  termination  of  the  present  embargo.  The  agree- 
ment is  not  yet  in  actual  operation  pending  the  conclusion  of 
certain  minor  details. 

Indian  Government. — A  very  comprehensive  arrangement 
has  been  made  between  the  United  States  and  the  British  Gov- 
ernment whereby  the  latter  supplies  the  Federal  Reserve  Bank 
of  New  York,  acting  for  all  Federal  Reserve  Banks,  with  suf- 
ficient rupee  exchange  each  month  to  enable  importers  in  the 
United  States  to  pay  for  necessary  imports  from  India.  Up  to 
December  31  the  Federal  Reserve  Bank  of  New  York  had  re- 
ceived credits  aggregating  Rs.  192,500,000,  of  which  Rs.  187,- 
476,132  have  been  sold  and  transferred,  with  a  most  satisfactory 
result  in  the  stabilization  of  exchange  between  the  United  States 
and  the  East. 

Banks  Organized  for  Transacting  Foreign  Business  and  For- 
eign Branches  of  Member  Banks  of  the  Federal  Reserve 
System. 

Section  25  provides  for  the  establishment  of  foreign  branches 
by  national  banks,  which  was  formerly  not  permitted  under 
American  bank  regulations: 

Sec.  25.  Any  national  banking  association  possessing  a 
capital  and  surplus  of  $1,000,000  or  more  may  file  application 
with  the  Federal  Reserve  Board  for  permission  to  exercise,  upon 
such  conditions  and  under  such  regulations  as  may  be  prescribed 
by  the  said  board,  either  or  both  of  the  following  powers: 


BANK  BRANCHES  ABROAD  395 

First.  To  establish  branches  in  foreign  countries  or  de- 
pendencies or  insular  possessions  of  the  United  States  for  the 
furtherance  of  the  foreign  commerce  of  the  United  States,  and 
to  act  if  required  to  do  so  as  fiscal  agents  of  the  United  States. 

Second.  To  invest  an  amount  not  exceeding  in  the  ag- 
gregate ten  per  centum  of  its  paid-up  capital  stock  and  surplus 
in  the  stock  of  one  or  more  banks  or  corporations  chartered 
or  incorporated  under  the  laws  of  the  United  States  or  of  any 
State  thereof,  and  principally  engaged  in  international  or  for- 
eign banking,  or  banking  in  a  dependency  or  insular  possession 
of  the  United  States  either  directly  or  through  the  agency, 
ownership,  or  control  of  local  institutions  in  foreign  countries, 
or  in  such  dependencies  or  insular  possessions. 

Such  application  shall  specify  the  name  and  capital  of  the 
banking  association  filing  it,  the  powers  applied  for,  and  the 
place  or  places  where  the  banking  operations  proposed  are  to  be 
carried  on.  The  Federal  Reserve  Board  shall  have  power  to 
approve  or  to  reject  such  application  in  whole  or  in  part  if  for 
any  reason  the  granting  of  such  application  is  deemed  inex- 
pedient, and  shall  also  have  power  from  time  to  time  to  increase 
or  decrease  the  number  of  places  where  such  banking  operations 
may  be  carried  on. 

Every  national  banking  association  operating  foreign  branches 
shall  be  required  to  furnish  information  concerning  the  condi- 
tion of  such  branches  to  the  Comptroller  of  the  Currency  upon 
demand,  and  every  member  bank  investing  in  the  capital  stock 
of  banks  or  corporations  described  under  subparagraphs  two 
of  the  first  paragraph  of  this  section  shall  be  required  to  fur- 
nish information  concerning  the  condition  of  such  banks  or  cor- 
porations to  the  Federal  Reserve  Board  upon  demand,  and  the 
Federal  Reserve  Board  may  order  special  examinations  of  the 
said  branches,  banks,  or  corporations  at  such  time  or  times  as 
it  may  deem  best. 

Before  any  national  bank  shall  be  permitted  to  purchase 
stock  in  such  corporation  the  said  corporation  shall  enter  into 
an  agreement  or  undertaking  with  the  Federal  Reserve  Board 
to  restrict  its  operations  or  conduct  its  business  in  such  manner 
or  under  such  limitations  and  restrictions  as  the  said  board  may 
prescribe  for  the  place  or  places  wherein  such  business  is  to  be 


396  INTERNATIONAL  COMMERCE 

conducted.  If  at  any  time  the  Federal  Reserve  Board  shall 
ascertain  that  the  regulations  prescribed  by  it  are  not  being  com- 
plied with,  said  board  is  hereby  authorized  and  empowered  to 
institute  an  investigation  of  the  matter  and  to  send  for  persons 
and  papers,  subpoena  witnesses,  and  administer  oaths  in  order  to 
satisfy  itself  as  to  the  actual  nature  of  the  transactions  referred 
to.  Should  such  investigation  result  in  establishing  the  failure 
of  the  corporation  in  question,  or  of  the  national  bank  or  banks 
which  may  be  stockholders  therein,  to  comply  with  the  regula- 
tions laid  down  by  the  said  Federal  Reserve  Board,  such  na- 
tional banks  may  be  required  to  dispose  of  stock  holding  in  the 
said  corporation  upon  reasonable  notice. 

Every  such  national  banking  association  shall  conduct  the 
accounts  of  each  foreign  branch  independently  of  the  accounts 
of  other  foreign  branches  established  by  it  and  of  its  home  office, 
and  shall  at  the  end  of  each  fiscal  period  transfer  to  its  gen- 
eral ledger  the  profit  or  loss  accrued  at  each  branch  as  a  sepa- 
rate item. 

Any  director  or  other  officer,  agent,  or  employee  of  any 
member  bank  may,  with  the  approval  of  the  Federal  Reserve 
Board,  be  a  director  or  other  officer,  agent,  or  employee  of  any 
such  bank  or  corporation  above  mentioned  in  the  capital  stock 
of  which  such  member  bank  shall  have  invested  as  hereinbefore 
provided,  without  being  subject  to  the  provisions  of  section 
eight  of  the  Act  approved  October  fifteenth,  nineteen  hundred 
and  fourteen,  entitled  "An  Act  to  supplement  existing  laws 
against  unlawful  restraint  and  monopolies,  and  for  other  pur- 
poses." 

The  Annual  Report  of  the  Federal  Reserve  Board  for  1918 
has  the  following  to  say  with  regard  to  the  activities  of  the  mem- 
ber banks  of  the  system  and  other  banking  corporations  which 
became  eligible  to  membership  through  the  partial  purchase  of 
their  stock  by  member  banks : 

Under  section  25  of  the  Federal  Reserve  Act,  the  stock  of 
American  banking  corporations,  principally  engaged  in  interna- 
tional or  foreign  banking,  is  made  eligible  for  purchase  by  na- 
tional banks  having  capital  and  surplus  of  $1,000,000  or  more 
to  an  amount  not  exceeding  10  per  cent  of  their  capital  and  sur- 
plus, if  such  corporations  enter  into  agreements  with  the  Fed- 


BANE   BRANCHES  ABRl  . 

eral  Reserve  Board  by  means  of  which  the  Board  can  regulate 
their  operations  and  keep  general!}  Informed  as  to  their  con- 
dition. Up  to  the  present  time  five  such  institutions  have  filed 
agreements  defining  the  oprations  to  be  engaged  in  and  relating 
to  the  amount  and  character  of  their  investments,  deposits,  ac- 
ceptances, and  reserves.  The  corporations  with  which  agreement > 
have  been  made  are : 

American  Foreign  Banking  Corporation,  New  York  City  ; 
Mercantile  Bank  of  the  Americas  New  York  City;  First  Na- 
tional Corporation,  Boston,  Mass.;  Asia  Banking  Corporation, 
New  York  City;  International  Banking  Corporation,  New  York 
City. 

The  branches  and  agencies  located  in  foreign  countries  are 
subject  to  the  laws  of  the  country  in  which  located,  and  in  order 
to  be  able  to  compete  with  local  banks,  are  permitted  to  follow- 
in  general  the  local  banking  practice. 

The  American  Foreign  Banking  Corporation,  the  first  to 
file  an  agreement  with  the  Board,  has  acquired  or  established 
branches  in  the  Canal  Zone,  Panama,  and  Haiti  and  the  estab- 
lishment of  other  branches  has  been  authorized.  These  branches 
do  a  general  banking  business. 

The  Mercantile  Bank  of  the  Americas  has  expanded  through 
the  control  of  autonomous  banks  in  several  of  the  countries  of 
South  and  Central  America — Brazil,  Peru,  Venezuela,  Nicara- 
gua, and  Colombia.  Branches  have  been  opened  in  Paris  and 
Barcelona  and  agencies  in  five  of  the  Latin  American  countries. 
In  addition  to  receiving  local  deposits,  making  discounts,  and 
dealing  in  foreign  exchange,  these  affiliated  institutions  promote 
trade  by  bringing  together  buyers  and  sellers  acting  merely  as 
intermediaries  without  assuming  any  market  risks  themselves. 
This  bank  was  organized  in  191 5  by  private  banking  firms  in 
New  York,  but  now  numbers  among  its  stockholders  several  of 
the  large  member  banks  of  the  Federal  Reserve  System. 

The  entire  stock  of  the  First  National  Corporation  of  Bos- 
ton is  owned  by  the  First  National  Bank  of  thai  city.  At  the 
present  time  this  corporation  has  no  foreign  branches,  but  in- 
tends to  establish  them  as  its  business  develops.  An  office,  doing 
a  purely  discount  business,  is  now  maintained  in  New  York 
City.     During  the  past  vear  this  corporation  has  been  of  con- 


398  INTEENATIONAL  COMMEBCE 

siderable  assistance  in  facilitating  import  and  export  trade  with 
South  America,  the  Far  East,  and  West  Indies,  and  also  with 
European  countries. 

The  Asia  Banking  Corporation  was  organized  only  recently, 
but  plans  to  engage  in  a  general  international  and  foreign  bank- 
ing business  in  China,  in  the  insular  dependencies  of  the  United 
States,  and,  ultimately,  in  Siberia.  It  contemplates  opening 
branches  in  Shanghai,  Harbin,  Hankow,  Tientsin,  Peking,  and 
Vladivostok.  The  stock  of  this  corporation  is  owned  largely  by 
member  banks. 

The  International  Banking  Corporation  is  the  oldest  of  the 
banking  corporations  which  have  filed  agreements  with  the 
Board  having  opened  its  first  branch  in  Shanghai  in  1902.  Prac- 
tically all  of  the  capital  stock  of  this  corporation  is  owned  by 
the  National  City  Bank  of  New  York.  Its  field  of  operation 
covers  mainly  the  Orient — India,  China,  Japan,  the  Philippines, 
and  the  Malay  Archipelago — Central  America,  and  the  West 
Indies,  with  a  branch  in  London.  It  also  has  an  office  in  San 
Francisco.  It  is  engaged  principally  in  financing  the  export 
and  import  trade  centering  at  the  place  where  its  branches  are 
located. 

At  the  present  time  there  are  only  two  national  banks  hav- 
ing foreign  branches — the  National  City  Bank  of  New  York 
and  the  First  National  Bank  of  Boston. 

The  National  City  Bank  has  21  branches  in  South  America, 
Cuba,  Porto  Rico,  Russia,  and  Italy,  and  has  also  a  representa- 
tive in  Copenhagen.  The  Board  has  recently  authorized  it  to 
establish  branches  in  Belgium,  Switzerland,  Portugal,  and  Spain. 
These  banks,  while  branches  of  an  American  bank,  perform  the 
functions  of  local  banks  under  authority  of  local  law  of  the 
countries  in  which  they  are  established,  and  transact  a  general 
banking  business  in  their  respective  localities. 

The  First  National  Bank  of  Boston  has  one  branch  in 
Buenos  Aires,  opened  in  July,  191 7.  The  facilities  afforded  by 
this  branch  have  been  devoted  mainly  to  financing  our  trade  in 
wool  and  hides  with  the  Argentine. 

Among  the  State  member  banks  having  foreign  branches 
are  the  Guaranty  Trust  Co.  of  New  York,  the  Equitable  Trust 
Co.  of  New  York,  and  the  Farmers  Loan  and  Trust  Co.  of  New 


FEDEKAL  INCORPORATION  399 

York,  all  of  which  have  offices  in  both  England  and  France, 
and  agencies  throughout  the  world. 

The  Board  takes  this  occasion  to  renew  the  recommendation 
made  in  its  last  annual  report  that  section  25  of  the  Federal 
Reserve  Act  be  amended  so  as  to  provide  for  the  Federal  incor- 
poration of  banking  associations  engaged  solely  in  international 
and  foreign  banking,  stock  of  which  is  to  be  owned  by  national 
banks  and  which  will  operate  under  the  control  of  the  Federal 
Reserve  Banks. 

The  language  used  in  section  25  seems  to  indicate  the  inten- 
tion of  Congress  to  permit  such  banks  to  be  organized  under  the 
laws  of  the  United  States.  Many  national  banks  have  become 
stockholders  in  banks  which  have  been  organized  under  State 
laws  for  the  purpose  of  carrying  on  a  foreign  banking  business, 
in  accordance  with  the  terms  of  section  25. 

The  agreements  in  favor  of  Federal  incorporation  are — 

(a)  The  dual  control  exercise  by  the  Federal  Reserve  Board 
and  by  the  State  Banking  departments  is  liable  at  any  time  to 
cause  embarrassment,  or  may  operate  to  restrict  the  activities  of 
the  banking  corporation. 

(b)  A  banking  corporation  of  this  description  being  essen- 
tially a  national  enterprise  whose  stock  is  owned  by  national 
banks  having  been  authorized  by  an  act  of  Congress,  would 
seem  to  be  entitled  to  the  benefits  and  protection  of  a  Federal 
charter,  which  would  undoubtedly  be  of  great  value  in  compet- 
ing for  business  in  foreign  countries. 

Attention  is  called  also  to  the  fact  that  other  countries  are 
now  devoting  particular  attention  to  meeting  their  demands  after 
the  war,  as  regards  financial  facilities  for  trade,  and  the  finan- 
cing of  large  overseas  contracts.  A  committee  which  was  ap- 
pointed sometime  ago  at  the  instance  of  the  British  Board  of 
Trade,  recently  recommended  the  establishment  of  an  institution 
having  in  view  primary  objects  as  follows: 

(a)  To  afford  advice  and  financial  assistance  to  British 
commercial  and  industrial  undertakings  from  their  inception  and 
generally  to  further  the  developments  of  British  trade  industry 
and  commerce. 

(b)  To  make  advances  for  the  enlargement  of  works  and 
the  extension  of  plant  and  for  the  amalgamation  and  co-ordina- 


400  INTERNATIONAL  COMMERCE 

tion  of  works  and  business  with  a  view  to  effecting  economies 
in  the  cost  of  production. 

(c)  To  render  financial  assistance  in  connection  with  trans- 
actions involving  long  periods  of  credit. 

(d)  To  assist  in  obtaining  orders  from  abroad  for  British 
manufacturers  and  traders  and  to  grant  financial  facilities  for 
the  execution  of  such  orders,  especially  when  such  orders  are 
intended  to  be  executed  in  the  United  Kingdom. 

(c)  To  undertake  credit  operations  and  to  draw  and  accept 
bills. 

(/)  To  acquaint  themselves  with  the  conditions  of  trade  and 
with  the  business  requirements  of  all  countries  of  the  world  and 
to  enter  into  banking-agency  arrangements  in  such  countries 
with  Colonial  or  British  foreign  banks  or  where  necessary  to 
open  up  branches  and  agencies  in  such  countries. 

(g)  To  establish,  equip,  and  maintain  information  bureaus 
in  close  touch  with  the  Department  of  Commercial  Intelligence 
of  the  Board  of  Trade  for  furnishing  generally  with  reliable 
data  and  information  upon  opening  for  trade,  new  contracts, 
State  and  other  loans,  and  issue  proposals,  and  generally  upon 
all  matters  relating  to  foreign  trade  and  business  and  to  under- 
take the  examination  of  industrial  projects. 

(h)  To  act  as  an  agent  for  carrying  through  oversea  com- 
mercial and  financial  transactions  in  which  the  British  Govern- 
ment may  be  interested  and  to  receive  official  recognition  and 
assistance. 

(z)  To  undertake  trading  operations  and  business  on  their 
<nvn  account  or  jointly  with  others  either  through  the  medium 
of  syndicates  or  otherwise. 

There  does  not  seem  to  be  anything  to  prevent  American 
foreign  banks  from  engaging  in  the  operations  above  outlined 
with  the  possible  exception  of  undertaking  trading  operations  in 
business  on  their  own  account  or  jointly  with  others  in  such 
operations,  through  the  medium  of  syndicates,  but  in  the  opinion 
of  the  Board  all  charters  granted  to  banks  engaging  in  such  ex- 
tensive operations  should  be  uniform,  and  uniformity  can  best 
be  assured  through  a  Federal  charter. 

With  regard  to  the  progress  made  by  American  banks  in 
establishing  foreign  branches  and  connections,  and  with  regard 


BANKING   AFFILIATIONS  40I 

to  the  operations  of  the  foreign  banks  in  New  York,  the  Annual 
Report  for  1918  has  the  following  to  .say  : 

Prior  to  the  passage  of  the  Federal  Reserve  Act,  national 
banks  were  not  permitted  to  establish  branches  or  agencies 
abroad,  although  some  of  the  State  institutions  had  enjoyed  this 
privilege.  During  the  past  four  years  some  of  the  State  institu- 
tions have  extended  their  foreign  branches.  The  National  City 
Bank  of  New  York,  with  its  affiliated  institutions  the  Interna- 
tional Banking  Corporation,  has  established  many  branches 
abroad,  and  two  banking  corporations  organized  in  United 
States  to  carry  on  banking  in  foreign  countries  have  established 
a  large  number  of  branches  and  relations,  particularly  with 
Latin-American  countries. 

It  has  been  estimated  that  in  July,  1914,  not  less  than  150 
foreign  banking  institutions  maintained  branches  or  agencies  in 
London  in  addition  to  the  home  offices  of  many  British  banks 
doing  business  in  all  parts  of  the  world.  The  closest  kind  of 
banking  contact  was  thus  maintained  between  London  and  for- 
eign countries,  and  conduits  were  established  through  which 
money  flowed  into  and  out  of  London  in  accordance  with  the 
movements  of  trade  and  the  relation  of  London  rates  to  those 
prevailing  in  other  centers.  The  number  of  such  branches  and 
agencies  of  foreign  banks  in  New  York  and  other  American 
cities  has  increased  considerably  during  the  European  War,  but 
the  limited  nature  of  the  business  which  the  law  of  New  York 
State  permits  branches  or  agencies  or  foreign  institutions  to 
transact,  undoubtedly  acts  as  a  deterrent  to  the  progress  of  the 
movement.  A  branch  of  a  foreign  bank  may  receive  no  de- 
posits in  New  York  State,  and  several  foreign  institutions,  in 
order  to  obtain  broader  banking  privileges  than  the  New  York- 
law  would  permit  their  branches  to  exercise  have  acquired  sub- 
stantial ownership  or  control  of  American  institutions  conduct- 
ing business  in  New  York  City.  Among  these  may  be  mentioned 
the  Royal  Bank  of  Canada  with  its  interest  in  the  Merchants 
National  Bank  of  New  York;  the  Banca  Commerciale  Italiana 
of  Milan  with  a  branch  of  its  own  in  New  York  and  control  of 
the  Lincoln  Trust  Company  of  New  York,  and  the  Banco  di 
Sconto  del  Circondario,  owning  jointly  with  the  Guaranty  Trusi 
Company  the  Italian  Discount  &  Trust  Company  of  New  York. 


402  INTERNATIONAL  COMMERCE 

Many  of  these  banks  are  large  lenders  of  money  and  pur- 
chasers of  bills  in  the  United  States.  Many  others  are  large 
buyers  of  bills  drawn  in  foreign  countries  on  American  banks, 
the  market  for  which  in  such  countries  is  doubtless  much  facili- 
tated by  the  existence  of  branches  of  local  institutions  in  the 
United  States  through  which  such  bills  can  be  readily  negotiated. 
While  it  may  be  said  that  the  establishment  of  such  branches 
of  agencies  of  foreign  banks  in  the  United  States  constitutes 
competition  of  a  certain  kind  with  American  banks,  nevertheless 
the  undoubted  widening  of  banking  contact  between  the  United 
States  and  foreign  countries  which  they  bring,  and  the  beneficial 
effect  of  such  contact  upon  the  development  of  dollar  exchange 
and  our  discount  market,  would  seem  to  justify  a  reconsidera- 
tion in  the  situation  from  a  broad  point  of  view  and  possibly 
some  liberalization  of  the  operations  which  such  institutions  may 
conduct  in  New  York  State. 

2.     AMERICAN  BANKS  AND  THEIR  SERVICES  TO  EXPORTERS  SINCE 
THE  ENACTMENT  OF  THE  FEDERAL  RESERVE  ACT. 

Until  the  inauguration  of  the  Federal  Reserve  system  the 
service  of  American  banks  in  the  financing  of  foreign  shipments 
was  of  necessity  inadequate  because  of  the  limitations  pointed 
out  in  the  portion  of  this  work  dealing  with  their  activities  be- 
fore the  passing  of  the  Act.  The  principal  limitation  was  in 
their  lack  of  an  open  discount  market.  The  laws  and  regu- 
lations under  which  American  banks  had  been  operating  were 
like  a  child's  garment  outgrown  by  the  wearer.  The  enactment 
of  the  Federal  Reserve  Act  remedied  to  a  large  extent  the  con- 
ditions which  had  prevailed,  and  it  provided  a  machinery  for 
dealing  with  any  problems  which  the  banks  may  face  in  connec- 
tion with  the  needs  of  America's  international  commerce. 

The  Federal  Reserve  Act  was  passed  at  an  unusually  op- 
portune moment,  for  the  events  of  the  world  war,  culminating 
with  America's  entry  into  the  war  on  the  side  of  the  Allies  and 
with  the  signing  of  the  peace  not  only  put  a  tremendous  strain 
upon  the  banking  mechanism  and  the  industrial  community  in 
America  which  would  have  found  both  hopelessly  inadequate 
under  old  conditions,  but  particularly  the  era  of  reconstruction 


BRANCHING  OUT   ABROAD  403 

and  re-adjustment  which  set  in  after  the  signing  of  the  peace 
found  America  in  so  new  a  relation  to  foreign  commerce  in  gen- 
eral that  the  reform  in  our  international  banking  facilities,  short 
of  the  ideal  as  it  still  is,  must  be  described  as  literally  providen- 
tial. 

American  banks  have  been  eager  to  take  advantage  of  the 
opportunities  suggested  by  the  trend  of  the  new  regulations.  A 
large  number  of  them  possessed  foreign  exchange  departments 
even  before  the  war.  Some  of  them  had  installed  foreign  trade 
departments  undertaking  to  furnish  auxiliary  services  to  their 
clients.  But  the  stimulus  of  the  Federal  Reserve  Act  has  led 
many  additional  banks  to  install  foreign  trade  departments,  and 
some  have  organized  branches  in  foreign  countries.  Not  only 
national  banks,  but  trust  companies  and  banking  corporations 
which  had  operated  under  state  charters  maintain  now  elabo- 
rately equipped  foreign  trade  departments  which  can  co-operate 
with  the  manufacturer  and  the  merchant  in  many  helpful  ways. 
Some  of  these  institutions  have  published  elaborate  handbooks 
on  various  features  of  commercial  banking,  either  of  general 
character  or  pertaining  to  certain  markets. 

The  question  whether  to  have  branches  in  foreign  countries 
or  to  maintain  working  arrangements  with  banks  already  exist- 
ing there  is  one  that  allows  of  discussion.  There  is  no  doubt 
that  both  of  these  methods  have  certain  important  advantages 
and  some  disadvantages.  Among  the  banks  which  have  organ- 
ized branches  abroad  the  National  City  Bank  of  New  York  is 
the  foremost.  The  National  City  Bank,  with  which  the  Inter- 
national Banking  Corporation  is  now  affiliated,  maintains  55 
branches  abroad — for  both  of  these  organizations.  New  branches 
are  added  continuously.  The  advocates  of  the  establishment  of 
foreign  branches  claim  for  this  system  the  following  advantages : 
continuity  of  responsibility,  inviolability  of  trade  secrets,  the 
care  of  merchandise,  reliable  credit  information. 

The  important  point  in  solving  this  problem  is  to  decide 
whether  the  branch  of  the  American  bank  in  a  foreign  country 
is  to  do  banking  business  for  America  with  that  particular  coun- 
try or  to  engage  in  banking  operations  in  that  country.  It  seems 
that  the  advantage  of  a  fully  controlled  branch  Is  an  obvious 


464  [NTEENATIONAL  COMMERCE 

one.  Such  a  branch  is  likely  to  be  more  fully  devoted  to  the 
interests  of  American  clients  than  the  native  correspondent  of 
an  American  bank.  On  the  other  hand  the  staff  of  a  foreign 
branch  of  an  American  bank  consists  of  Americans,  who  are 
foreigners  in  the  place  of  their  activity,  and  as  a  rule  not  in  so 
intimate  a  relationship  to  the  business  people  among  whom  they 
.-'re  cast  as  the  staff  and  the  management  of  a  native  bank  that 
acts  as  correspondent  for  an  American  bank.  But  this  is  a  dis- 
tinction against  the  foreign  bank  branch  which  is  likely  to  be- 
come less  and  less  important  with  time,  a<  the  staff  gains  in  ex- 
perience and  forms  local  connections.  The  training  of  managers 
and  employees  capable  of  being  entrusted  with  the  duty  of  at- 
tending to  the  financial  interests  of  American  clients  in  foreign 
commercial  centers  in  a  difficult  one.  The  remarkable  com- 
bination of  the  knowledege  of  American  and  foreign  banking 
as  applied  to  local  foreign  conditions  cannot  be  either  quickly 
taught  or  acquired. 

There  must  be  also  in  the  home  office  a  specially  trained 
staff  in  close  touch  with  each  branch.  There  must  be  visits  of 
special  members  of  the  home  staff  to  the  various  branches.  There 
must  be  return  visits  of  foreign  branch  managers  or  other  mem- 
bers of  the  staff  to  the  home  office.  Such  an  organization  must 
grow  and  learn,  and  in  the  course  of  time,  with  the  proper  selec- 
tion of  the  material,  and  with  a  wise  policy  with  regard  to  em- 
ploying native  help  abroad  (a  very  delicate  problem)  it  is  sure 
to  measure  up  to  requirements.  Will  that  American  swiftness  of 
perception  and  of  technique  acquisition  which  excited  the  ad- 
miration of  the  world  in  the  operations  of  American  troops  in 
Europe  adequately  overcome  the  handicap  in  competition  with 
the  laboriously  trained  experienced  natives  in  foreign  banking 
fields?  This  is  a  question  which  experience  alone  will  answer, 
though  the  observation  of  the  workings  of  existing  foreign 
branches  of  American  banks  leads  to  expect  an  affirmative  re- 
ply. They  have  done  wonders  in  the  brief  time  of  their  existence. 
Meanwhile  the  task  of  training  the  future  managers  and  em- 
ployees of  foreign  branches  of  American  banks  must  be  carried 
on  with  systematic  and  never  failing  zeal. 

The  National   City  Bank   of   New  York,   with  its   foreign 


PROGRESSIVE  AMERICAN   BANKS 

brunches  and  their  counter-organization  at  home,  and  with   its 
foreign  trade  department  and  with  the  connections  of  that 
partment  (distinct  from,  though  co-operating  with  the  banking 
department),  represents  a  most  efficient  and  admirably  equi] 
organization.    It  has  set  a  pattern  for  the  operation  of  American 
bank  branches  abroad.     Its  foreign  Trade  Department  is  i 
efficiently  managed.     The  National  City  Bank  has  pul 
large  number  of  valuable  pamphlets  dealing  with  variou 
of  foreign  trade  as  related  to  banking.     Its  monthly  bulletin  on 
economic  conditions  is  also  highly  regarded  by  those  interested 
in  the  current  topics  of  economic  character. 

The  Guaranty  Trust  Company  of  New  York  is  another  New- 
York  bank  which  devotes  special  attention  to  foreign  banking. 
It  has  its  own  banking  offices  in  New  York,  London,  Liver 
Paris  and  Brussels.  For  Italy  it  maintains  a  working  arrange- 
ment with  the  Italian  Discount  and  Trust  Company  of  New 
York,  for  Spain  and  Portugal  it  has  an  arrangement  with  the 
Mercantile  Bank  of  Americas  which  has  an  office  in  Barcelona, 
and  it  has  excellent  connections  throughout  Latin  America.  For 
the  Far  East  it  has  affiliated  itself  with  the  Asia  Banking  Cor- 
poration, while  it  also  has  a  working  arrangement  with  the  Tata 
Industrial  Bank  of  India  for  the  Indian  trade.  Its  foreign  trade 
bureau  is  expertly  managed.  The  Guaranty  Trust  Company  has 
also  issued  a  number  of  important  booklets  dealing  with  foreign 
trade  problems. 

Among  the  national  banks  catering  for  foreign  trade  we 
may  mention  the  Irving  National  Bank  and  the  National  Bank 
of  Commerce  in  New  York,  as  institutions  which  have  organized 
their  foreign  financing  business  with  much  wisdom  and  effi- 
ciency. The  Irving  National  Bank  has  no  branches  of  its  own, 
but  its  affiliations  abroad  (based  on  mutual  service)  are  very 
close  and  help  it  to  render  a  world  service  to  its  clients.  The 
publications  of  the  Irving  National  Bank  on  trading  with  Latin 
America  and  with  the  Far  East  are  classics  and  should  be  in 
the  hands  of  every  business  man  doing  a  foreign  business. 

The  National  Bank  of  Commerce,  together  with  the  First 
National  Bank  of  Boston  and  in  co-operation  with  the  Comptoir 
National  d'Escompte  de  Paris,  has  established  the  French-Amer- 


406  INTERNATIONAL  COMMERCE 

ican  Banking  Corporation,  placing  at  the  disposal  of  its  clients 
the  service  of  native  French  bankers  in  a  way  which  a  mere 
correspondence  affiliation  could  not  do.  It  has  paid  a  particular- 
ly close  attention  to  the  training  of  its  staff  in  the  business  of 
foreign  exchange  and  financing.  Its  foreign  trade  bureau  is  very 
efficient. 

But  even  outside  of  New  York,  banks  and  trust  companies 
in  America  have  realized  their  great  opportunity  to  serve  their 
clients  and  to  promote  the  interests  of  American  trade  abroad 
by  utilizing  to  the  fullest  extent  their  new  facilities  under  the 
Federal  Reserve  Act  as  called  for  by  the  needs  of  their  clientele. 
We  might  mention  in  this  connection  the  Central  Trust  Co.  of 
Chicago  and  the  First  National  Bank  of  Boston,  though  banks 
in  almost  every  large  city  in  the  United  States  might  be  men- 
tioned in  this  connection. 

Certain  banking  corporations  have  been  organized  since 
1914  specifically  for  foreign  business.  Among  these  may  be  men- 
tioned the  Mercantile  Bank  of  the  Americas  particularly  for  the 
Latin-American  fields,  the  Asia  Banking  Corporation  for  the 
Orient  and  the  American  Foreign  Banking  Corporation  in  New 
York. 

Finally  reference  must  be  made  to  the  branches  in  America 
of  foreign  banks  which  are  especially  equipped  to  deal  with  im- 
ports from  and  exports  to  the  countries  which  form  the  special 
sphere  of  their  activities. 

In  considering  the  service  of  American  banks  to-day  it  may 
be  said  that  at  the  present  time  the  American  exporter  is  in  no 
way  behind  his  competitors  in  foreign  countries  in  regard  to 
facilities  under  national  auspices  which  are  open  to  him.  Amer- 
ica has  become  a  creditor  nation,  and  the  task  of  providing  for 
commercial  credits  in  America's  foreign  trade  will  need  all  the 
support  of  a  well  equipped  banking  organization.  Even  beyond 
mere  commercial  credits,  the  prospect  of  American  investments 
in  foreign  enterprises  and  in  national  and  municipal  issues  of 
foreign  countries  opens  up  a  new  and  a  vastly  increased  field 
of  usefulness  for  American  banks.  This  has  been  fully  recog- 
nized by  American  bankers,  and  as  a  symptom  of  this  attitude 
it  may  be  mentioned  that  the  Investment  Bankers  Association 


EFFICIENT  BANK  SERVICE  407 

of  America  has  organized  a  committee  on  foreign  securities, 
composed  of  America's  foremost  financiers,  the  purpose  of  which 
is  to  study  ways  and  means  for  the  furtherance  and  for  the  pro- 
tection (if  this  should  ever  be  necessary)  of  ihe  interests  of 
American  investors  in  foreign  securities. 

The  existing  improvements  in  the  service  of  American  banks 
confronts  the  American  business  men  with  a  situation  which 
has  in  it  somewhat  of  the  "embarrassment  of  riches,"  to  trans- 
late a  French  phrase  denoting  the  difficulty  of  choosing  from 
among  superabundant  offerings.  What  should  an  American 
business  man  expect  from  a  bank  which  caters  to  his  require- 
ments in  foreign  trade  financing,  and  how  can  he  set  in  motion 
the  machinery  of  the  bank  chosen  by  him  for  his  own  particular 
use? 

The  bank  chosen  by  the  American  business  man  for  the 
various  forms  of  banking  service  connected  with  the  export  and 
the  import  of  merchandise  and  for  the  financing  of  transactions 
involved  therein,  must  furnish  trade  advice  which  it  can  give 
better  than  he  can  secure  for  himself. 

The  financing  of  foreign  trade  is  primarily  the  problem  of 
adjusting  international  credits,  in  order  that  shipments  of  actual 
funds  between  countries  may  be  reduced  to  a  minimum.  The 
bank  equipped  to  accomplish  this  task  most  efficiently,  most  ex- 
peditiously and  at  the  lowest  cost  is  rendering  to  its  customers 
engaged  in  foreign  trade  a  maximum  of  genuine  service.  All 
other  services  which  a  bank  may  render  are  secondary  to  this 
prime  consideration. 

Efficiency  in  handling  foreign  transactions  is  dependent 
upon  adequate  foreign  connections  and  a  thoroughly  trained 
staff.  The  business  man  must  be  assured  that  the  bank  which  he 
uses  for  his  foreign  trade  requirements  has  the  best  connections 
in  the  areas  where  he  seeks  his  markets,  with  that  intimate 
knowledge  of  local  conditions  which  it  is  to  difficult  for  a  for- 
eign bank  to  acquire.  The  second  requisite  is  a  thoroughly 
trained  staff.  The  bank  must  have  a  foreign  department  officered 
with  men  not  only  familiar  with  the  technicalities  of  foreign 
exchange  and  financial  and  commercial  conditions  abroad,  but 
with  the  whole  fabric  of  American  industrial  life  as  it  is  con- 


40s  INTERNATIONAL  COMMERCE 

cerned  m  foreign  trade.  Under  their  direction  must  be  a  stall 
not  only  well  trained  on  the  technical  side,  but  developed  toward 
the  end  of  giving  each  customer  and  each  transaction  intelligent 
personal  service  essential  to  the  handling  of  the  complicated 
transactions  arising  in  foreign  trade. 

From  the  standpoint  of  most  users  of  commercial  banking 
accommodations,  the  operations  of  major  interest  are  the  finan- 
cing of  exports  and  imports.  Neither  manufacturers  nor  ex- 
porters, here  or  abroad,  are  in  a  position  to  go  to  any  large  ex- 
tent into  the  extension  of  credits.  Their  business  is  not  to  loan 
money  on  interest  but  to  turn  it  over.  The  business  of  a  bank 
specializing  in  foreign  trade  is  the  loaning  of  funds  and  credit 
for  foreign  trade  operations.  This  is  done  either  by  discounting 
lulls  of  exchange  or  by  the  use  of  the  bank  credit,  the  latter 
method  being  in  increasing  favor  in  the  American  business 
world. 

The  bank  selected  by  the  American  business  man  for  his 
foreign  trade  requirements  must  do  a  large  business  in  financing 
transactions  by  the  acceptance  method.  In  addition  to  the  finan- 
cing of  exports  and  imports  in  the  strict  sense  it  must  deal  large- 
ly in  foreign  exchange  arising  out  of  all  the  phases  of  modern 
international  life,  as  exchange  arising  from  the  export  and  the 
import  of  securities,  loans  on  the  international  money  market  and 
miscellaneous  operations,  such  as  the  issuance  of  travelers' 
checks  and  letters  of  credit,  and  all  kinds  of  remittances  abroad. 
In  this  connection  it  should  possess  a  direct  drawing  system, 
by  which  interior  banks  may  arrange  to  draw  direct  on  its 
branches  or  correspondents  abroad,  thus  shortening  the  time  re- 
quired to  complete  transactions. 

The  most  satisfactory  method  by  which  to  establish  bank 
relationships  for  foreign  trade  is  to  open  an  account,  arranging 
tor  a  regular  "line"  of  credit  for  use  in  connection  with  for- 
eign trade  operations.  In  order  to  do  this,  it  is  not  necessary 
for  the  exporter  or  the  importer  to  be  a  customer  of  the  bank 
for  general  banking  business,  and  separate  "lines"  may  be  opened 
for  export  discounts  and  import  credits.  The  more  advantage- 
ous method,  however,  is  to  maintain  in  the  same  bank  accounts 
both  for  domestic  and  foreign  business.    This  is  especially  desir- 


BANKS  AND  CLIENTS  400 

able  since  expansion  of  business  operations  to  meet  a  larger 
market  will  usually  involve  additional  lines  of  credit  for  domes- 
tic use.  A  domestic  or  foreign  depositor  who  only  occasionally 
may  need  facilities  for  financing  foreign  business  can  do  it  on 
the  strength  of  his  regular  domestic  "line"  of  credit.  But  if  i 
large  foreign  business  is  contemplated,  it  then  becomes  necessary 
to  open  a  regular  "line"   for  foreign  business  exclusively. 

Opening  an  account  both  for  domestic  and  foreign  business 
is,  however,  but  one  method  by  which  a  New  York  bank  ma)  be 
of  service  to  firms  engaged  in  foreign  trade.  Many  linns  and 
corporations  located  inland,  who  do  their  banking  business  for 
domestic  purposes  in  the  cities  where  they  are  located,  carry 
New  York  balances  to  use  in  making  settlements  in  connection 
with  foreign  business.  This  represents  a  saving  in  interest 
charges.  Other  firms,  on  the  other  hand,  may  find  it  advisable 
to  make  their  foreign  connections  not  directly  but  through  their 
local  banks.  Not  only  should  a  bank  specializing  in  foreign 
trade  offer  its  services  to  these  classes  of  firms,  but  in  addition 
also  to  these  customers  who  do  not  establish  deposit  relations 
but  who  utilize  only  its  collection  and  discount  facilities. 

A  bank  deals  in  money  and  credits  as  a  merchant  deals  in 
goods,  and  firms  engaged  in  foreign  trade  should  seek  that  bank 
which  gives  them  at  the  lowest  cost  the  best  financial  service  for 
that  purpose.  No  secondary  considerations  should  lead  either 
the  bank  or  the  client  to  lose  sight  of  this  fundamental  fact. 
At  the  same  time  there  are  many  other  services  which  a  bank 
may  render  to  its  customer  in  connection  with  foreign  trade 
without  adding  to  the  cost  of  the  financial  service  rendered. 
One  of  these  services  is  in  the  furnishing  of  credit  reports. 
Every  bank  fostering  foreign  connections  should  develop  and 
keep  up-to-date  this  branch  of  its  service. 

With  regard  to  foreign  trade  service,  while  a  number  of 
banks  maintain  elaborate  foreign  bureaus,  a  bank  is  not  and  can 
not  be  equipped  to  furnish  advice  on  foreign  trade  matters  be- 
vond  a  certain  point.  It  should  maintain  a  well  equipped  lib* 
a  statistical  department  and  facilities  for  conveying  trade  op 
portunities  to  the  knowledge  of  its  clients  as  communicated  by 
its  foreign  branches  or  connections,  but  it  goes  beyond  it^  - 


410  INTERNATIONAL  COMMERCE 

if  it  attempts  to  make  itself  an  adjunct  of  a  manufacturer's 
sales  department  or  compete  with  the  functions  of  official  or  as- 
sociational  trade  promotion. 

Under  the  impetus  of  the  Federal  Reserve  Act  American 
hanks  have  made  an  immense  progress  in  a  comparatively  short 
time,  and  an  American  exporter  will  have  no  difficulty  in  secur- 
ing a  desirable  banking  connection  for  his  foreign  trade  require- 
ments that  will  adequately  meet  all  the  foregoing  considerations. 


CHAPTER  XVII. 

The  Problem  of  Foreign  Credits   (concluded,). 

E.      THE  USE  OF  CREDIT  INSTRUMENTS  IN   AMERICAN   PRACTICE. 

i.    Drafts  and  Credits. 

We  dealt  in  Chapter  XIV  with  the  use  of  credit  instru- 
ments in  German  and  in  British  banking  practice.  In  Chapter 
XV  we  reviewed  the  facilities  of  American  banks  for  negotiat- 
ing drafts  for  American  shippers  under  the  restrictions  of  Amer- 
ican banking  regulations  which  prevailed  before  the  enactment 
of  the  Federal  Reserve  Act.  In  Chapter  XVI  we  discussed  the 
effects  of  the  Federal  Reserve  System  upon  the  operations  of 
American  banks  and  the  development  of  their  service  to  Amer- 
ican exporters  under  the  broader  regulations  of  the  Federal  Re- 
serve Act  and  its  various  amendments.  We  have  not  yet  reached 
by  any  means  the  ideal  stage  of  banking  practice  in  dealing  with 
credit  instruments.  But  the  Act  provides  for  a  supervision  of 
banking  practice  and  for  the  introduction  of  desired  improve- 
ments, and  very  great  progress  has  certainly  been  made,  with 
every  prospect  of  the  perfecting  of  a  fully  adequate  mechanism, 
adapted  to  the  needs  of  America's  trade  with  the  world,  in  the 
course  of  time. 

Our  present  consideration  will  be  given  to  a  review  of  the 
various  credit  instruments  which  are  used  in  the  American  bank- 
ing practice  to-day.  Of  these  the  negotiation  of  drafts,  docu- 
mentary (with  shipping  documents  attached)  and  "clean"  (not 
attached  to  shipping  documents)  and  the  opening  of  commercial 
credits  with  the  bank  upon  the  initiative  of  the  buyer,  either  in 
the  shape  of  "confirmed"  credit  or  an  authority  to  negotiate 
drafts,  have  been  already  described  from  the  point  of  view  of 
the  European  practice  and  of  the  American  pre-war  practice. 
There  is  no  difference  in  principle  between  any  of  these  practices 
and  the  present  day  practice,  though  there  are  the  natural  minor 


4112  INTERNATIONAL   UOA1MEKCE 

differences  of  rates  and  charges,  and  principally  in  the  scope  of 
operations  by  the  banks  in  dealing  with  these  instruments.  It 
will  suffice,  therefore,  to  review  briefly  the  principal  character- 
istics of  these  credit  instruments.  We  have,  however,  before  us 
two  important  credit  instruments,  the  bank  acceptance  and  the 
trade  acceptance,  which  are- new  to  American  banking  practice. 
The  bank  acceptance  plays  an  important  part  in  the  financing  of 
foreign  shipments  and  this  we  will  consider  at  length.  The  trade 
acceptance  is  limited  to  domestic  usage. 

The  documentary  draft  discounted  by  the  bank.  This  is  a 
draft  to  which  the  shipping  documents  are  attached.  The  ex- 
porter has  sold  certain  goods  to  a  customer  abroad  whose  credit 
standing  he  had  investigated  and  found  satisfactory.  When 
shipment  is  made,  he  draws  a  draft  on  his  customer,  attaching 
to  it  the  proper  shipping  documents,  generally  the  original  bill 
of  lading  with  any  negotiable  copy ;  the  marine  and  war  risk 
insurance  certificate,  the  certificate  of  origin  and  other  certifi- 
cates which  the  laws  of  the  country  of  destination  may  require, 
invoice,  etc. 

Drafts  may  be  either  sight  drafts,  likewise  called  demand 
drafts,  being  payable  upon  presentation  to  drawee  by  the  branch 
or  correspondent  abroad  of  the  bank  in  America  to  which  the 
drawer  turns  over  the  draft  for  collection  or  for  discount ;  or 
they  may  be  time  drafts,  payable  a  certain  period  after  presenta- 
tion, usually  at  60,  90  or  120  days. 

Time  drafts  may  be  drawn  either  a  certain  period  after  sight 
or  after  the  date  of  the  draft.  The  draft  on  arrival  at  destina- 
tion is  presented  to  the  drawee  for  acceptance.  When  the  draft 
is  drawn  in  dollars,  it  should  bear  the  note  "payable  at  bank's 

drawing  rate  on  day  of  payment   for drafts  on   New 

York." 

When  the  draft  is  presented  to  the  bank  for  collection,  the 
drawer  must  wait  for  the  collection  to  be  effected  and  receives 
the  proceeds  in  due  course.  But  if  he  wishes  to  use  the  money 
at  the  time  of  shipment,  he  may  turn  over  the  draft  to  the  bank 
for  discount.  Here  the  bank  will  undertake  to  discount  the  draft 
when  the  credit  standing  of  the  drawer  warrants  it.  The  bank- 
loans  the  money  to  the  drawer  while  waiting  for  the  proceeds. 
Naturally  the  discounting  is  done  with  recourse  to  the  drawer. 


DOCUMENTARY   DRAFTS  413 

in  other  words  if  the  drawee  fails  to  honor  the  draft,  the  drawer 
must  return  the  amount  loaned  by  the  bank  on  the  draft  with 
accrued   interest  and  expenses. 

The  branch  of  the  American  bank  or  its  correspondent 
presents  the  draft,  whether  taken  for  collec  ion  or  for  discount- 
ing, to  the  drawee.  The  shipping  documents  attached  to  it  are 
as  a  rule  marked  "to  order"  (where  foreign  regulations  do  nor 
forbid  this)  and  are  surrendered  to  the  drawee  upon  compliance 
with  instructions  issued  by  the  shipper,  which  means  generally 
that  in  the  case  of  sight  drafts  the  documents  placing  the  drawee 
in  possession  of  the  shipment  are  surrendered  after  payment, 
and  in  the  case  of  time  drafts  after  "acceptance."  The  accept- 
ance is  effected  by  the  drawee  writing  or  stamping  the  word 
"Accepted"  with  his  signature  and  the  date  across  the  face  of 
the  draft.  The  accepted  draft  is  held  until  maturity  and  then 
at  maturity  it  operates  as  a  sight  draft.  If  the  amount  is  drawn 
in  dollars,  the  draft  bears  the  note  "payable  at  the  bank's  draw- 
ing rate  on  date  of  payment  for days   (or  for  sight  ) 

drafts  on  New  York."  The  drawee  must  then  procure  a  draft 
for  New  York  funds.  According  to  country  and  to  the  us 
of  drafts  a  charge  of  1-1/8  to  3  per  cent  is  made  for  discount- 
ing and  interest  is  added  for  the  time  between  the  payment  of 
the  discounted  draft  to  the  drawer  and  the  arrival  of  the  pro- 
ceeds in  New  York,  as  well  as  revenue  stamp  charges  on  bills 
of  exchange  abroad. 

The  charge  for  collecting  drafts  is  much  smaller,  generally 
running  from  1/8  to  1%.  The  proceeds  may  be  cabled,  if  the 
drawer  so  instructs  the  bank.  The  drawer  may  also  make  pro- 
visions for  protesting  the  drafts  in  case  of  non-payment. 

Drafts  accompanied  by  documents  are  referred  to  as  D.A. 
drafts,  if  the  documents  are  to  be  surrendered  against  acceptance, 
and  D.P.  if  they  are  to  be  surrendered  against  payment. 

It  is  highly  important  in  every  case  to  give  complete  instruc- 
tions to  the  bank  with  regard  to  various  emergencies.  In  the 
case  of  D.A.  drafts  it  is  usual  to  instruct  that  the  draft  after 
acceptance  be  held  until  maturity  and  payment  by  the  bank  at 
the  point  of  destination;  only  rarely  the  drawer  instructs  that 
the  draft  be  returned  to  the  bank  in  America.  Instructions  as 
to  how  to  proceed  if  the  draft  is  not  accepted  and  what  to  do 


414  INTEENATIONAL  COMMERCE 

with  the  documents  in  that  case  are  exceedingly  important.  It 
might  be  well  to  instruct  the  bank  to  notify  someone  in  the  case 
cf  non-payment,  which  wise  precaution  sometimes  can  save 
much  loss.  The  exporter  should  have  a  clear  understanding  with 
his  customer  as  to  the  payment  of  commissions,  exchange  costs, 
etc. 

The  clean  draft  discounted  by  the  bank.  The  proceeding 
is  the  same  as  in  the  foregoing  case,  only  the  element  of  security, 
as  far  as  the  bank  is  concerned,  is  lessened  by  the  absence  of 
documents  giving  control  over  the  shipment.  The  discounting 
of  such  drafts  is  based  entirely  upon  the  solvency  of  the  ex- 
porter. 

Confirmed  credits.  The  foreign  customer  may  arrange  with 
a  bank  or  a  business  house  in  United  States  to  confirm  his  orders 
and  to  accept  drafts  of  the  exporter  covering  his  purchase. 

The  confirmed  credit  is  called  an  irrevocable  credit,  because 
it  cannot  be  cancelled  without  the  consent  of  the  vendor.  Credits 
are  accompanied  by  instructions  with  regard  to  the  vendor's  acts 
prerequisite  to  payment,  which  the  bank  must  see  that  the  vendor 
effects  correctly.  Payment  is  generally  made  against  the  sur- 
render by  the  exporter  of  a  full  set  of  shipping  documents  with- 
in the  expiration  limit  of  the  confirmed  credit  or  before  the 
cancellation  of  the  unconfirmed  credit. 

Authority  to  negotiate  with  or  without  recourse.  Occasion- 
ally the  customer  arranges  with  his  bank  to  instruct  an  Amer- 
ican bank  to  negotiate  the  exporter's  drafts  up  to  a  specified 
amount  either  with  recourse  (when  the  vendor's  liability  is  main- 
tained until  the  draft  is  met)  or  without  recourse.  The  former 
proceeding  is  naturally  permissible  only  when  the  customer  is 
a  concern  of  the  highest  standing  and  enjoys  the  utmost  con- 
fidence of  the  vendor. 

Other  forms  of  credit  established  by  foreign  customers  for 
the  payment  of  their  purchases  in  America  are  the  foreign  bank's 
credit  or  the  buyer's  export  credit. 

A  foreign  bank  occasionally  issues  a  credit  on  itself  in  favor 
of  the  American  shipper  authorizing  him  to  draw  on  it  to  a  cer- 
tain amount.  It  advises  the  shipper  the  name  of  the  American 
bank  with  whom  the  draft  may  be  negotiated  against  the  sur- 


REVOLVING    CREDITS  415 

render  of  shipping  documents.     The  shipper's  draft  may  be  at 
sight  or  a  time  draft. 

Or  the  customer  may  arrange  with  his  bank  to  open  an  ex- 
port credit  in  America,  authorizing  the  bank  to  pay  the  shipper 
a  certain  amount  of  money  against  the  presentation  of  the  docu- 
ments covering  a  certain  shipment  or  to  accept  his  draft. 

Revolving  credits  are  customary  where  the  relations  between 
the  vendor  and  the  buyer  are  currently  continuous.  The  buyer, 
the  vendor  and  the  bank  agree  on  the  conditions  under  which 
the  credit  after  being  used  once  may  become  again  available, 
without  the  necessity  of  exchange  of  cables  or  correspondence 
between  the  contracting  party.  In  its  "Handbook  of  Finance 
and  Trade  with  South  America"  the  National  City  Bank  cites 
three  classes  of  revolving  credit : 

"A"  in  foreign  country  opens  a  credit  in  favor  of  "B"  in 
this  country  up  to  say  $20,000,  the  conditions  of  which  per- 
mit "B"  to  draw,  as  shipments  are  made,  upon  bank  through 
which  credit  is  made  available,  the  said  bank  honoring  such 
drafts  when  accompanied  by  documents  covering  a  specific  ship- 
ment. Upon  liquidation  by  "A"  of  the  amount  or  amounts 
drawn  by  "B,"  the  amount  or  amounts  so  liquidated  again  become 
available  to  be  drawn  against  by  "B"  under  the  original  con- 
ditions. Should  the  total  amount  of  the  credit  become  exhausted, 
no  further  drawings  thereunder  may  be  made  by  "B"  until 
liquidation  by  "A"  of  all  or  of  a  portion  of  the  drafts  drawn 
by  "B."  This  explains  the  revolving  feature  of  this  credit,  in- 
asmuch as  the  full  credit,  or  such  portions  thereof  as  have  been 
liquidated  by  "A,"  again  become  automatically  available  to  be 
drawn  against  by  "B." 

The  second  class  of  credit  under  this  revolving  form  per- 
mits "B,"  upon  "A's"  instructions  to  bank,  to  draw  a  specified 
sum  in  one  draft.  Upon  maturity  and  payment  of  this  draft  by 
"A,"  the  same  amount  again  becomes  available  to  be  drawn 
against  by  "B"  upon  the  same  conditions  which  governed  the 
original  drawing. 

Under  the  third  class  of  revolving  credit,  "A"  in  a  foreign 
country  permits  "B"  in  this  country  to  draw  in  one  draft  for 
the  full  amount  involved,  whereupon  the  credit  again  becomes 
automatically  available  for  a  similar  amount  and  so  on  indefi- 


410  INTERNATIONAL  CUMMEKCi) 

nitely  until  the  expiration  of  the  time  limit  specified  in  the  ori- 
ginal instructions. 

This  last  form  of  credit  is  limited  as  to  time,  but  as  to  the 
amounts  drawn  thereunder  it  is  only  limited  to  the  units  in  which 
the  drafts  may  be  drawn,  no  limit  being  set  as  to  the  maximum 
amount  which  may  be  drawn  thereunder. 

It  is  also  possible  to  limit  drawings  to  a  certain  amount 
during  a  special  period,  to  be  drawn  in  one  or  in  various  drafts, 
the  original  amount  again  becoming  available  at  the  expiration 
of  each  such  periods. 

The  revolving  credit  is  very  elastic  in  its  application  and 
may  be  made  to  serve  any  reasonable  requirements  along  the 
lines  suggested  in  the  illustrations. 

Furthermore,  it  should  be  noted  that  the  commission  charged 
by  the  bank  is  calculated  not  upon  the  full  amount  for  which 
credit  is  originally  opened,  but  upon  the  amount  or  amounts  as 
availed  of  thereunder. 

2.    Specimens  of  Drafts  and  Credits. 

i.  Blank  draft  furnished  by  the  International  Banking 
Corporation.  (Interest  is  provided  for  until  approximate  due 
date  of  remittance  in  London  or  New  York.) 

Drawn  under No. ;  dated 

,  19— 


At days  after  sight  of  this  first  of  exchange   (sec- 
ond being  unpaid)    pay  to  the  order  of the 

sum  of ,  with  interest  added  thereto  at per  cent 

per  annum,  from  date  hereof  to  approximate  due  date  of 
remittance  in  London  or  New  York.  Payable  at  the  cur- 
rent drawing  rate  for  the  International  Banking  Corpora- 
tion's drafts  at  sight  on  London  or  New  York.  Value  re- 
ceived. 

To 1 , 


2.    Ninety  days'  draft  on  France  for  $i,ooo.    Draft  drawn 
at  the  rate  of  52.21  •_>,  making  5,225  francs  equal  to  $1,000.  Draft 


DRAFT  SPECIMENS  417 

is  drawn  to  order  of  drawers  and  must  be  indorsed  on  back : 

"Pay  to  the  order  of .     (Signed)  Chas. 

Brown  &  Co." 

Exchange  for 

Fes.  5225.  Chicago,  August  8,  1919. 

Ninety  days  after  sight  of  this  first  of  exchange  (sec- 
ond of  the  same  tenor  and  date  unpaid-  pay  to  the  order 
of  ourselves  Francs  Fifty-two  hundred  and  twenty-five 
no/100. 

Value  received  and  charge  same  to  account. 

Chas.  Brown  &  Co. 
To  John  Smith  &  Co., 
No.  3274.  Havre,  France. 

3.  Sterling  draft  on  South  America,  drawn  for  £1,000  at 
3  days'  sight.  Payment  is  to  be  made  in  Argentine  equivalent 
which  will  purchase  a  90  days'  sight  bill  on  London;  draft  is 
drawn  to  order  of  bank. 

£1,000.  New  York,  August  28,  1912. 

At  three  days'  sight  of  this  first  of  exchange   (second 

unpaid)  pay  to  the  order  of  the Bank, 

the  sum  of  One  thousand  pounds  sterling,  payable  in  legal 
currency  at  the  bank's  drawing  rate  on  day  of  payment 
for  ninety  days'  sight  bills  on  London.  Value  received 
in  goods  per  S.  S.  Amazon. 

Johnson  &  Co. 

To  Jose  Gonzalez, 

Buenos  Aires. 
No.  7432. 

4.  Draft  for  $1,000  drawn  at  60  days'  sight  in  American 
dollars,  payment  to  be  made  in  Argentine  equivalent  for  sight 
bills  on  New  York  at  the  bank's  drawing  rate  on  day  of  pay- 
ment. 

$1,000  U.  S.  Currency. 

Newark,  N.  J.,  August  27,  1912. 

At  sixty  days'  sight  of  this  first  of  exchange   (second 

unpaid)    pay   to   the   order   of   ,   the 

sum  of  One  thousand  dollars  United  States  gold,  payable 
in  legal  currency  at  the  bank's  drawing  rate  on  day  of 
payment  for  sight  bills  on  New  York.  Value  received  in 
goods  per  S.  S.  Manchester. 

James  Smith  &  Bro. 

To  Juan  Fernandez  e  Hijo, 

Bahia  Blanca,  Argentina. 
No.  612. 


418  INTERNATIONAL  COMMERCE 

5.  Thirty  days'  sight  draft  for  $1,000  United  States  gold 
on  Brazil  providing  for  payment  in  Brazilian  currency  for  sight 
drafts  on  New  York. 

Exchange  for  $1,000  U.  S. 

Yonkers,  N.  Y.,  September  5,  1919. 
Thirty  clays  after  sight  of  this  first  of  exchange   (sec- 
ond unpaid)  pay  to  the  order  of Bank, 

One  thousand  dollars  United  States  gold.  Payable  in 
Brazilian  currency  at  bankers'  rate  for  sight  drafts  on 
New  York. 

Value  received,  which  place  to  account  of  shipment  per 
S.  S.  Manitoba. 

Albert  Brown  &  Co. 
To   Pedro   de   Gama, 

Santos,  Brazil. 
No.  2525. 

6.  Sight  draft  on  Argentina  for  $1,000  gold,  payable  in 
Argentine  gold  at  bankers'  rate  for  sight  drafts  on  New  York. 

No.  17533. 

Baltimore,  Md.,  January  3,   1919. 

Exchange  for  $1,000. 

At  sight  of  tliis  first  of  exchange   (second  unpaid)   pay 

to    the    order    of   Bank,    the    equivalent 

of  One  thousand  dollars  United  States  gold  (payable  in 
Argentine  gold  at  hankers'  rate  for  sight  drafts  on  New 
York).  Value  received,  and  charge  the  same  to  account 
of  shipment  per  S.  S.  Mexico. 


To  Jose  Lopez. 

Mendoza,   Argentina. 


Johnson  &  Robinson. 


7.     Ninety  days'  draft   for  $1,000  United   States  gold  on 
Montevido. 

Exchange   for  $1,000  U.  S. 

Washington,   D.   O,   January   6,   1919. 
Ninety  days  after  sight  of  this  first  of  exchange   (sec- 
ond unpaid)  pay  to  the  order  of Bank,  One 

thousand    dollars    United    States    gold.      Payable    in    gold 
currency  at   bankers'  rate  for  sight  drafts  on  New  York. 
Value  received,  which  place  to  account  of  shipment  per 
S.  S.  Meridian. 

Smith  &  Smith. 
To  Silva  &  Cia., 

Montevideo.  Uruguay. 
No.  5515. 


DRAFT  SPECIMK  n;, 

8.  Draft  on  Buenos  Aires  in  dollars,  figuring  to  bring  the 
drawer,  when  discounted,  an  equivalent  of  about  $1,000. 

$1,027.50. 

Chicago,  111.,  July  2,  1910. 
At  90  days  after  sight  of  this  first  of  exchange  (sec- 
ond unpaid)  pay  to  the  order  of  the  Anglo-South  Amer- 
ican Bank  (Ltd.),  the  sum  of  One  thousand  twenty- 
seven  50/100  dollars  United  States  gold,  payable  in 
legal  currency  at  the  bank's  drawing  rate  on  day  of 
payment  for  sight  bills  on  New  York.  Value  received 
in  goods  per  S.  S.  Peru. 

Brown  &  Greene. 
To  Aviles  &  Cia., 
Buenos  Aires. 

The  invoice  in  this  case  amounted  to  $i,ooo;  150  days'  in- 
terest (30  days  each  way  for  voyage  and  90  days'  time  of  draft) 
was  added,  at  6  per  cent  per  annum,  and  also  a  collecting  com- 
mission of  one-fourth  of  1  per  cent.  Discounted  at  the  usual 
rate  of  2V2  per  cent,  it  will  yield  $1,001.82. 

9.  Draft  in  sterling  figured  to  bring  the  drawer  after  dis- 
counting an  equivalent  of  about  $1,000. 

£214-1-3. 

Cincinnati,  Ohio,  July  7,  1912. 

At  90  days  after  sight  of  this  first  of  exchange  (sec- 
ond unpaid)  pay  to  the  order  of  the  Anglo-South  Amer- 
ican Bank  the  sum  of  Two  hundred  fourteen  pounds 
one  shilling  and  three  pence,  payable  in  legal  currency 
at  the  bank's  drawing  rate  on  day  of  payment  for  90 
days'  sight  bills  on  London.  Value  received  per  S.  S. 
Mongolia. 

Robert  Lee  &  Co. 

To  Gomez  &  Gomez, 

Buenos  Aires. 

Adding,  as  in  specimen  No.  8,  150  days'  interest  at  6  per 
cent  to  the  amount  of  invoice  and  collection  charges  of  one- 
fourth  of  1  per  cent,  the  dollars  are  converted  into  sterling  at 
$4.80  to  1  pound  sterling.  The  banker's  charge  will  be  3V2  pet- 
cent,  but  by  using  $4.80  as  basis  of  conversion  instead  of  $4.85 
(the  pre-war  demand  rate  on  London)  the  shipper  charges 
an  extra  1  per  cent  for  the  privilege  of  settling  at  the  90  days' 
sight  rate.  This  draft  will  yield,  when  discounted  at  3V2  per 
cent,  $t.oot.8t. 


420  INTERNATIONAL  COMMERCE 

10.     Specimen  of  Banker's  authority  to  negotiate 
drafts  without  recourse. 


IRVING 

NATIONAL 

BANK 

New  York 

Foreign  Department 

January  2nd, 

1919 

In  replying  please  quote 

Export  Credit 

ADVICE  600/100. 

F.  C.  Supply  Co., 

1  Broadway, 
New  York  City. 

Gentlemen: 

We  are  instructed  by  the  Japanese  Bank  to  negotiate  as  of- 
fered, without  recourse,  your  documentary  bills  at  ninety  days  sight 
on  Reizo  Matsuoka,  Kobe,  to  the  extent  of  NINE  HUNDRED  AND 
00/000  DOLLARS  ($900.00)  at  one  time  outstanding,  for  invoice 
cost  of  goods  shipped  to  that  port. 

The  bills  must  be  accompanied  by  a  full  set  of  Bills  of  Lading 
(Express  Company's  Bills  of  Lading  not  acceptable)  and  Insur- 
ance Certificates  covering  marine  insurance  and  also  war  risk  in- 
surance, made  out  to  order  and  endorsed  in  blank  together  with 
invoice  covering  merchandise  shipped  from  America  to  Kobe,  and 
shipping  documents  to  be  delivered  against  payment  of  the  rela- 
tive drafts. 

The  drafts  must  be  drawn  to  order,  endorsed  in  blank  and  be 
marked : 

"Drawn  under  authorization  of  the  Japanese  Bank,  No.  100" 
and  must  bear  the  following  clause: 

"Payable  with  interest  added  at  the  rate  of  6%  per  annum 
from  date  of  draft  until  approximate  arrival  of  cover  in  New 
York." 

This  authorization  is  subject  to  cancellation  and/or  modifica- 
tion by  us  at  any  time. 

Kindly  hand  in  this  letter  with  your  drafts  in  order  that  the 
amounts  of  the  same  may  be   endorsed  on  the  back  hereof. 

Yours  very  truly, 

PRO  FORMA 

Vice  President. 


(Courtesy  of  Irving  National  Bank.) 


CKEDIT  SPECIMENS  421 

11.     Specimen  of  Export  Credit. 


IRVING  NATIONAL  BANK  OF  NEW  YORK 

New  York,  June  18th,  1919 


SXPORT  CREDIT  No.  191 


EXPIRING  November  30,  1919 


Messrs.  John  Doe  &  Company 
New  York  City. 

Gentlemen : — 

We  are  informed  that  you  will  draw  upon  us  for  account 

of Jose    Alfau at sight to    the    extent 

of  Ten  Thousand  and  00/100  Dollars   ($10,000.00) covering 

a  shipment  of  merchandise. 

Documents  (complete  sets  unless  otherwise  stated)  compris- 
ing Bills  of  Lading  issued  to order,  endorsed  in  blank 

Invoices 

Insurance  policies  covering  marine  and  war  risk. 

to  be  delivered  to  us  against  payment. 

Insurance  as  above. 

This  letter  is  for  your  guidance  in  preparing  documents  and 
conveys  no  engagement  on  the  part  of  this  Bank  as  we  have  no 
instructions  to   confirm   the   Credit. 

Bills  of  Lading  issued  by  Forwarding  Agents  will  not  be 
accepted  unless  specifically  authorized  herein  and  any  modifica- 
tions of  the  terms  of  the  credit  must  be  in  writing  over  author- 
ized signatures  of  this  Bank. 

Drawings  must  clearly  specify  the   number   of  this  Credit. 

Yours   very   truly, 
IVING  NATIONAL  BANK  NEW  YORK 


Vice  President 


Manager  Foreign  Department 
Entered 


(Courtesy  of  Irving  National  Bs;*k.) 


422  INTERNATIONAL  COMMERCE 

12.    Specimen  of  Import  Letter  of  Credit. 
IMPORT  LETTER  OF  CREDIT   (DOLLARS) 


Credit  No.  134567 
$100,000— U.S.C. 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

Foreign  Department 

New  York,  February  11,  1919 
John  Doe  &  Company, 
Yokohama,  Japan. 

Dear  Sirs: 

At  the  request  and- for  the  account  of Johnson  Crawford 

&  Company,  New  York we  hereby  authorize  you  to  value  on 

Guaranty  Trust  Company  of  New     York,  New  York 

at Four  (4)  Months  sight for  the  sum  not  exceeding  a  total 

of. ......... ......One  hundred  thousand  dollars   ($100,000) 

accompanied    by    commercial    invoice,    consular    invoice,    bills    of    lading 

Marine  and  war-risk,  insurance  certificates 

representing cost,  insurance  and  freight shipment  of 

Raw  Silk  from  Yokohama,  Japan,  to  New  York 

Insurance Marine  and  war-risk  insurance  to  be  effected  by  the 

shippers 

Bills  of  lading  for  such  shipments  must  be  drawn  to  the  order 
of Guaranty  Trust  Company  of  New  York,  New  York 

A  copy  of  the  consular  invoice  and  one  bill  of  lading  must  be  sent 
by  the  bank  negotiating  drafts,  direct  to  Guaranty  Trust  Company  of 
New  York,  New  York. 

The  amount  of  each  draft  negotiated  must  be  endorsed  hereon. 

We  hereby  agree  with  bona  fide  holders  that  all  drafts  drawn  by 
vitrue  of  this  Credit,  and  in  accordance  with  the  above  stipulated  terms, 
shall   meet   with    due    honor   upon    presentation   at   the    Guaranty    Trust 

Company  of  New  York,  New  York,  if  drawn  and  negotiated  to 

May  31,  1919. 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK 


N.  B.  Drafts  drawn  under  this  Credit 
must  bear  the  clause  "drawn  un- 
der Letter  of  Credit  No.  134567, 
Dated  February  11,  1919." 


CREDIT  SPECIMENS  L23 

13.     Specimen  of  a  Revocable  Export  Credit. 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK. 

New  York,  February  26,  1919 

To  The  United  States  Mercantile  Co., 

140  Broadway,  New  York  City. 

EXPOET  CREDIT 

No.  Ex-60001 
Dear  Sirs: 

Jn  accordance   with   cable   instructions   1 Lved    from 

Banco  Mercantil  Americano  dc  Colombia,  Bogota we  open 

a  revocable  credit  in  your  favor  for  account  of The  South  American 

Import   Company,  Bogota,   Colombia amount   $50,000.00    (Fifty    thou- 
sand Dollars)    covering  shipment  of coffee   cleaning   machinery 

from  New  York  to  Barranquilla,  Colombia. 

Drafts  under  this  Letter  of  Credit  are  to  be  drawn   at 

sight  on us and  are  to  be  accompanied  by  a  set  of  Shipping 

Documents   which  must  meet   with   our   approval,  consisting  of: 
Shipper's  Invoices 

Consular  invoices  if  such  documents  are  required  in  connection  with 
this  shipment. 

Marine    and    War    Risk    insurance    policies 

Full  set  of  ocean  steamer  Bills  of  Lading made  out  to  order  and 

endorsed  in  blank,  or  to  the  order  of  the  Banco  Mercantil  Americano  lie 
Colombia. 

It  must  be  understood  that  payments  under  this  Credii  will  only 
be  made  provided  the  goods  are  actually  on  board  or  loading  on  the 
Vessel   named   in   the  B/L. 

If  Government  regulations  restrict  the  issue  of  order  Bills  of  Lading, 
please  communicate  with  us  and  we  will  advise  you  in  the  premises. 

Marine  insurance  should  cover  from  Warehouse  to  Warehouse,  and 
not  less  than  ten  days  after  arrival,  and  also  include  deviation  clause, 
craft  and  lighter  clause,  negligence  aud/or  latent  defect  clause.  Policies 
reading  Free  of  Particular  Average  completely,  must  not  be  tendered 
without  prior  arrangement  with  us. 

This  Letter  of  Credit  is  issued  subject  to  all  regulations  and  enact- 
ments of  the  United  States  Government  and  its  Allies  and  to  any  proc- 
lamations  of  the  President   governing  export   shipments. 

The  documents  should  be  presented  whenever  possible  in  time  to  :  e 
forwarded  on  the  steamer  carrying  the  merchandise. 

This  Letter  of  Credit  expires June  30,   1919 unless  sooner 

revoked. 

If  you  are  unable  to  comply  with  the  terms  as  indicated  above, 
please   communicate   with   us  promptly,   and   oblige, 

Yours  respectfully, 
GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

This  is  a  form  of  an  export  credit,  opened  by  a  foreign 
buyer  through  the  Guaranty  Trust  Company  of  New  York,  in 
favor  of  a  manufacturer,  exporter,  or  shipper  in  the  United 
States. 

The  specimen  shown  is  a  revocable  credit,  which  means  that 
although  a  date  of  expiration  is  placed  on  the  credit,  it  is,  never- 
theless, subject  to  cancellation  at   any  time. 


424  INTERNATIONAL  COMMERCE 

15.    Specimen  of  an  Irrevocable  Export  Credit. 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK. 

To  The  American  Export  Association, 
140  Broadway,  New  York  City. 

EXPORT  CREDIT 
No.  C-60000 
Dear  Sirs: 

In  accordance  with cable instructions   received  from 

Banco  Mercantil  Americano  del  Peru,  Lima,  Peru 

we  open  an  irrevocable  credit  in  your  favor  for  account  of The  South 

American  Import  Company,  Lima,  Peru Amount  $100,000.00 

(One  hundred   thousand Dollars)    covering  shipment  of 

general  merchandise  from  New  York  to  Callao,  Peru. 

Drafts  under  this  Letter  of  Credit  are  to  be  drawn  at 

sight  on us and  are  to  be  accompanied  by  a  set  of  Shipping 

Documents  which  must  meet  with  our  approval,  consisting  of: 

Shipper's  invoices • 

Consular  invoices  if  such  documents  are  required  in  connection  with 
this  shipment. 

Marine  and  War  Risk  insurance  policies 

Full  set  of  ocean  steamer  Bills  of  Lading made  out  to  order  and 

endorsed  in  blank,  or  to  the  order  of  the  Banco  Mercantil  Americano  del 
Peru. 

This  Letter  of  Credit  is  Valid  only  upon  there  having  been  issued 
an  appropriate  Export  License,  covering  the  transaction. 

It  must  be  understood  that  payments  under  this  Credit  will  only  be 
made  provided  the  goods  are  actually  on  board  or  loading  on  the  Vessel 
named  in  the  B/L. 

If  Government  regulations  restrict  the  issue  of  order  Bills  of  Lading, 
please  communicate  with  us  and  we  will  advise  you  in  the  premises. 

Marine  insurance  should  cover  from  Warehouse  to  Warehouse,  and 
not  less  than  ten  days  after  arrival,  and  also  include  deviation  clause, 
craft  and  lighter  clause,  negligence  and/or  latent  defect  clause.  Policies 
reading  Free  of  Particular  Average  completely,  must  not  be  tendered 
without  prior  arrangement  with  us. 

This  Letter  of  Credit  is  issued  subject  to  all  regulations  and  enact- 
ments of  the  United  States  Government  and  its  Allies  and  to  any  proc- 
lamations of  the  President  governing  export   shipments. 

The  documents  should  be  presented  whenever  possible  in  time  to  be 
forwarded  on  the  steamer  carrying  the  merchandise. 

This  Letter  of  Credit  expires June  30,1919 

If  you  are  unable  to  comply  with  the  terms  as  indicated  above,  please 
communicate  with  us  promptly,  and  oblige, 

Yours  respectfully, 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

This  credit  differs  from  the  revocable  export  credit,in  that, 
as  an  irrevocable  credit,  it  cannot  be  cancelled  prior  to  the  date 
specified  in  the  credit,  without  the  consent  of  the  party  in  whose 
favor  it  is  issued. 

(Courtesy  of  Guaranty  Trust  Company  of  New  York.) 


BANK  ACCEPTANCES  *2S 

3.    Bank  Acceptance  Practice. 

Bank  acceptances  have  been  in  use  for  centuries  in  the  finan- 
cial centers  of  Europe.  They  are  new  credit  instruments  in 
American  usage,  and  in  the  few  years  of  their  use  they  have 
proved  so  valuable  an  adjunct  to  the  financial  mechanism  of  the 
nation  that  the  rapid  extension  of  their  use  and  the  perfecting 
of  the  conditions  favoring  such  expansion  (as  a  broad  accept- 
ance discount  market  and  the  removal  of  certain  still  existing 
restrictions)  can  be  confidently  looked  forward  to  as  the  natural 
development  of  the  system. 

The  term  acceptance  is  given  to  a  draft  or  bill  of  exchange 
drawn  to  order,  for  a  definite  sum  of  money,  payable  at  a  definite 
time  after  the  date  of  the  draft  or  after  its  presentation  to  the 
drawee,  the  obligation  to  pay  having  been  "accepted"  by  the 
drawee,  by  means  of  an  acknowledgment  written  or  stamped 
across  the  face  of  the  instrument  and  signed  by  him.  This  ac- 
knowledgment constitutes  the  agreement  of  the  drawee  to  pay 
the  draft  at  maturity  in  accordance  with  its  tenor,  without  any 
qualifying  conditions.     Such  an  accepted  draft  is  negotiable. 

The  vendor  of  merchandise  draws  upon  the  buyer  for  the 
price  of  the  merchandise  sold  to  him.  The  buyer  accepts  the 
draft.  This  constitutes  a  "trade  acceptance."  But  the  buyer 
may  arrange  with  a  bank  that  the  vendor  shall  draw  on  that 
bank  and  the  bank  shall  accept  the  draft  for  the  buyer's  account. 
This  draft  becomes  a  bank  acceptance.  And  indeed,  the  Federal 
Reserve  Board  defines  a  bank  acceptance  as  "a  draft  or  bill  of 
exchange  of  which  the  acceptor  is  a  bank  or  trust  company,  or 
a  firm,  person,  company,  or  corporation  engaged  in  the  business 
of  granting  bankers'  acceptance  credits." 

Such  instruments  offer  an  excellent  means  of  investment. 
The  responsibility  for  their  payment  is  based  upon  the  credit 
standing  of  financially  solvent  banking  institutions.  The  accept- 
ances are  covered  by  bankers'  clients  either  by  deposit  of  clear- 
ing house  funds  one  day  prior  to  maturity,  or  deposit  of  cash 
or  check  of  the  Federal  Reserve  Bank  on  the  day  of  maturity, 
or  a  debit  to  the  client's  account  on  the  day  of  maturity  against 
funds  cleared. 

Section  13  of  the  Federal  Reserve  Act,  as  amended,  pro- 


i  16  INTERNATIONAL  COMMERCE 

vides  as  follows  with  regard  to  the  power  of  national  banks  as 
members  of  the  Federal  Reserve  System  to  accept  drafts  or  bills 
of  exchange : 

"Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  having  not  more  than  six  months'  sight  to  run, 
exclusive  of  days  of  grace, 

"I.  Which  grow  out  of  transactions  involving  the  importa- 
tion or  exportation  of  goods ;  or 

"II.  Which  grow  out  of  transactions  involving  the  do- 
mestic shipment  of  goods  provided  shipping  documents  convey- 
ing or  securing  title  are  attached  at  the  time  of  acceptance;  or 

"III.  Which  are  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  documents  conveying  a  secur- 
ing title  covering  readily  marketable  staples. 

"No  member  bank  shall  accept,  whether  in  a  foreign  or  do- 
mestic transaction,  for  any  one  person,  company,  firm,  or  cor- 
poration to  an  amount  equal  at  any  time  in  the  aggregate  to  more 
than  ten  per  centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus,  unless  the  bank  is  secured  either  by  attached  docu- 
ments or  by  some  other  actual  security  growing  out  of  the  same 
transaction  as  the  acceptance;  and 

"No  bank  shall  accept  such  bills  to  an  amount  equal  at  any 
time  in  the  aggregate  to  more  than  one-half  of  its  paid-up  and 
unimpaired  capital  stock  and  surplus : 

"Provided,  however,  that  the  Federal  Reserve  Board,  under 
such  general  regulations  as  it  may  prescribe,  which  shall  apply 
to  all  banks  alike  regardless  of  the  amount  of  capital  stock  and 
surplus,  may  authorize  any  member  bank  to  accept  such  bills  to 
an  amount  not  exceeding  at  any  time  in  the  aggregate  one  hun- 
dred per  centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus : 

"Provided,  further,  that  the  aggregate  of  acceptances  grow- 
ing out  of  domestic  transactions  shall  in  no  event  exceed  fifty 
per  centum  of  such  capital  stock  and  surplus. 

"IV.  Any  member  bank  may  accept  drafts  or  bills  of  ex- 
change drawn  upon  it  having  not  more  than  three  months'  sight 
to  run,  exclusive  of  days  of  grace,  drawn  under  regulations  to 
be  prescribed  by  the  Federal  Reserve  Board  by  banks  or  bankers 
in  foreign  countries  or  dependencies  or  insular  possessions  of 


IMPORTATION   ACCEPTANCES 

the  United  States  for  the  purpose  of  furnishing  dollar  exchange 
as  required  by  the  usages  of  trade  in  the  respective  countries, 
dependencies,  or  insular  possessions. 

"Provided,  however,  that  no  member  bank  shall  accept  such 
drafts  or  bills  of  exchange  referred  to  in  this  paragraph  for  any 
one  bank  to  an  amount  exceeding  in  the  aggregate  ten  per  centum 
of  the  paid-up  and  unimpaired  capital  and  surplus  of  the  accept- 
ing bank  unless  the  draft  or  bill  of  exchange  is  accompanied  by 
documents  conveying  or  securing  title  or  by  some  other  adequate 
security : 

"Provided,  further,  that  no  member  bank  shall  accept  such 
drafts  or  bills  in  an  amount  exceeding  at  any  time  the  aggregate 
of  one-half  of  its  paid-up  and  unimpaired  capital  and  surplus.'' 

The  National  City  Bank  in  its  booklet  on  "Bank  Accept- 
ances" gives  the  following  illustrations  of  the  use  of  bank  ac- 
ceptances arising  out  of  a  transaction  involving  the  importation 
or  the  exportation  of  goods,  acceptances  arising  out  of  domestic 
shipment  transactions,  acceptances  which  are  secured  by  ware- 
housed goods  and  drafts  drawn  for  the  purpose  of  providing 
dollar  exchange. 

An  Importation  Acceptance. 

An  importer  desires  to  purchase  some  raw  silk  in  Japan. 
He  goes  to  his  bank  and  explains  the  transaction.  His  credit 
standing  being  satisfactory,  his  bank  issues,  at  his  request,  a 
commercial  credit.  This  credit  authorizes  the  Japanese  exporter 
to  draw  on  the  bank  for  the  value  of  the  silk  which  the  importer 
is  purchasing.  The  credit  limits  the  total  amount  of  drafts 
which  may  be  drawn  under  it,  states  that  they  must  be  drawn 
and  negotiated  on  or  before  a  certain  date,  and  gives  the  usance ; 
that  is,  that  the  drafts  must  mature  thirty,  sixty  or  ninety  days, 
or  whatever  the  period  may  be,  after  sight.  It  also  stipulates 
what  documents  (shipping,  insurance,  etc.)  must  be  attached  to 
the  drafts. 

Since  the  importer  wants  to  get  his  silk,  there  is  not,  ordi 
narily,   time  to  wait   until   the  credit  has   reached   the  exporter 
Ihrough  the  mails.     Usually,  therefore,  the  information  is  cabled 
through  a  bank  located  in  the  vicinity  of  the  exporter. 


428  INTERNATIONAL  COMMERCE 

Upon  receipt  of  this  advice  the  exporter  prepares  his  raw 
silk  for  shipment.  As  soon  as  he  is  in  possession  of  the  ocean 
bill  of  lading  and  other  necessary  documents  he  draws  a  draft 
on  the  bank  in  this  country  issuing  the  credit  for  the  value  of 
the  silk,  the  draft  having  a  maturity  in  accordance  with  the 
terms  of  the  credit — let  us  say  ninety  days  after  sight.  To  the 
draft  he  attaches  the  documents  referred  to.  He  then  takes 
the  draft  to  his  local  bank,  which  purchases  the  draft  at  the 
current  rate  of  exchange  for  ninety-day-sight  dollar  bills. 

The  shipping  and  other  documents  are  all  made  out  or  in- 
dorsed so  as  to  give  the  bank  purchasing  the  draft  title  to  the 
goods. 

The  bank  in  Japan  now  forwards  the  draft  and  documents 
to  its  agency  or  correspondent  in  this  country.  The  papers  are 
all  presented  to  the  bank  issuing  the  credit.  If  it  finds  every- 
thing in  order,  it  accepts  the  draft,  returning  it  to  the  party  pre- 
senting it.  The  shipping  and  other  documents  are  retained  to 
be  surrendered  to  the  importer,  probably  in  exchange  for  a  trust 
receipt,  to  enable  him  to  get  his  raw  silk.  The  importer  thus 
has  ninety  days  in  which  to  secure  the  raw  silk  and  dispose  of 
it  before  he  is  required  to  place  his  bank  in  funds  to  meet  the 
maturing  draft.  The  representative  of  the  Japanese  bank  sells 
the  acceptance  in  the  open  market  at  the  prevailing  rate  for 
ninety-day  bills. 

For  making  this  transaction  possible  the  importer's  bank 
charges  him  a  small  commission  for  accepting  the  draft.  Only 
credits  issued  by  the  well-known  banks,  of  course,  will  be  ac- 
ceptable to  the  exporter,  as  he  wants  a  bill  which  will  command 
the  best  rate.  This  business  is,  therefore,  usually  handled  by 
banks  in  the  larger  centers.  The  lesser-known  institution  usually 
has  credits  required  by  its  importers,  issued  by  one  of  its  large 
correspondents,  under  the  guarantee  of  the  smaller  bank. 

An  Exportation  Acceptance. 

An  exporter  here  is  negotiating  for  the  sale  of  shoes  to  a 
firm  in  Argentina.  He  is  not  willing  to  ship  the  shoes  and  draw 
a  draft  direct  on  his  customer,  nor  is  he  willing  to  sell  him  on 
open  account.  It  is  therefore   necessary    for    the   purchaser    to 


EXPORTATION  ACCEPTANCES  429 

finance  the  transaction  by  means  of  a  banker's  credit.  The  pur- 
chaser goes  to  his  bank  in  the  Argentine  and  asks  it  to  arrange 
a  credit  with  its  correspondent  in  the  United  States  to  cover  the 
value  of  the  shoes.  The  Argentine  banker,  knowing  that  the 
purchaser  is  a  satisfactory  credit  risk,  requests  his  correspon- 
dent in  this  country  to  issue  the  credit.  The  Argentine  banker 
guarantees  that  the  bank  issuing  the  credit  will  be  placed  in 
funds  before  the  maturity  of  any  draft  drawn  on  it  under  the 
credit.  The  bank  here  then  advises  the  exporter  that,  as  re- 
quested by  the  purchaser,  it  will  accept  his  drafts  drawn  on  it 
up  to  a  certain  amount  when  the  drafts  are  accompanied  by  the 
documents  mentioned  in  the  Letter  of  Credit. 

These  documents,  of  course,  must  represent  the  shoes  which 
have  been  shipped.  The  credit  also  probably  states  that  it  ex- 
pires on  a  certain  future  date,  thus  making  it  necessary  for  the 
exporter  to  complete  his  end  of  the  transaction  within  a  reason- 
able time. 

As  soon  as  the  exporter  secures  his  necessary  shipping  and 
other  documents  he  draws  a  draft  on  the  bank  here  issuing  the 
credit,  having  a  maturity  in  accordance  with  its  terms,  for  the 
value  of  the  shoes.  The  exporter  presents  the  draft  and  docu- 
ments to  the  bank  issuing  the  credit.  Everything  being  as  stipu- 
lated in  the  credit,  the  bank  accepts  the  draft  and  returns  it  to 
the  exporter,  who  sells  it  in  the  market  and  thus  receives  pay- 
ment for  his  shoes.  The  documents  are  forwarded  to  the  bank 
requesting  that  the  credit  be  opened,  and  are  probably  released 
by  them  to  the  purchaser.  The  Argentine  bank,  through  remit- 
tances, or  by  charge  against  its  balance  in  this  country,  places 
its  correspondents  in  funds  to  meet  the  draft  at  maturity. 

Acceptances  Arising  Out  of  Transactions  Involving 
the  Domestic  Shipment  of  Goods 

A  manufacturer,  desiring  to  finance  his  purchases  of  raw 
material  through  the  medium  of  bankers'  acceptances,  requests 
his  bank  to  issue  a  credit  in  favor  of  the  people  from  whom  he 
is  purchasing.  The  credit  should  be  for  an  amount  not  exceed- 
ing, of  course,  the  value  of  the  goods  being  purchased.  The 
drafts  might  have  a  usance  which  would   give  the  purchaser 


430  INTERNATIONAL  COMMERCE 

time  to  make  up  the  raw  material  and  sell  the  manufactured  pro- 
duct. This  maturity  shoud  not,  however,  exceed  ninety  days, 
as  bills  with  a  longer  maturity  do  not  have  as  ready  market- 
ability. This  arrangement  being  satisfactory  to  the  seller,  he 
will  ship  his  goods,  draw  a  draft  for  their  value  on  the  bank  is- 
suing the  credit,  and  forward  the  draft  and  shipping  documents 
to  the  bank.  It  must  be  borne  in  mind  that  the  shipping  docu- 
ments must  be  so  issued  or  indorsed  as  to  give  the  bank  title 
to  the  goods.  The  bank  accepts  the  draft  and  returns  it  to  the 
shipper,  who  disposes  of  it  at  the  prevailing  discount  rate.  The 
documents  are  turned  over  to  the  manufacturer,  probably  under 
a  trust  receipt,  and  he  is  enabled  to  secure  his  raw  material, 
manufacture  and  sell  his  goods.  Before  maturity  he  is  required 
to  place  the  bank  in  funds  to  meet  the  draft. 

Acceptances  Which  Are  Secured  by  Readily 
Marketable  Goods  in  Warehouse. 

A  clothing  manufacturer,  for  example,  desires  to  carry  his 
stock  of  wool  through  the  use  of  banker's  acceptances.  He  places 
the  wool  in  a  warehouse,  draws  a  draft  on  his  bank  for  the 
value  of  the  wool,  attaching  the  warehouse  receipts  as  collateral. 
The  draft,  after  acceptance,  is  returned  to  him  to  be  sold,  the 
warehouse  receipts  being  retained  by  the  bank.  The  wool  must 
be  stored  in  a  warehouse  which  is  independent  of  the  manufac- 
turer; that  is,  the  manufacturer  must  not  have  any  control  of 
the  wool  as  long  as  the  warehouse  receipts  are  outstanding.  It 
is,  of  course,  possible  to  secure  possession  of  the  original  ware- 
house receipts  by  substituting  other  warehouse  receipts  for  wool, 
but  if  the  manufacturer  desires  to  take  down  wool  without  sub- 
stitution he  should  give  the  bank  the  cash  value  of  the  wool 
taken,  for  the  bank  should  be  secured  either  by  warehouse  re- 
ceipts or  cash  all  the  time  its  acceptance  is  out. 

Drafts  Drawn  for  the  Purpose  of  Furnishing  Dollar 
Exchange. 

It  sometimes  happens  that  persons  in  foreign  countries  hav- 
ing obligations  to  meet  here  are  not  able  tn  secure  dollar  ex- 


BANK  ACCEPTANCE  SPECIMENS  431 

change  to  remit  in  settlement.  To  provide  for  any  such  con- 
tingency the  law  and  the  regulations  of  the  Federal  Reserve 
Board  permit  banks  here  to  accept  drafts  drawn  on  them  by 
banks  in  certain  foreign  countries  for  the  purpose  of  furnishing 
such  dollar  exchange.  A  bank  desiring  to  accept  bills  drawn  for 
this  purpose  must  first  make  application  to  the  Federal  Reserve 
Board  for  permission  to  do  so.  The  restrictions  surrounding 
acceptances  for  this  purpose  are  full)'  set  forth  in  the  regulations 
and  informal  rulings  of  the  Board. 


Specimen  of  draft  drawn  abroad  in  dollars  and  accepted 
by  an  American  Bank. 

No.  20S9  $3,468.00 

Buenos  Ayres,  15  August,  1919 

Ninety  days  after  sight  pay  this  Firs!  of  Exchange 
(Second  and  Third  not  paid)  to  the  order  of  Smith,  Robin- 
son &  Co.,  the  sum  of  TEUEETHOTJSAND  FOURHTJN- 
DRED  SIXTYEIGHT  DOLLARS  U.  S.  Value  of  same 


•which  place  to  account against  wool  per  "Verdi" 

as  advised. 

To  National  City  Bank, 
New  York. 

Drawn  under  credit  N.C.B.  754. 

1  Signature) 

Smith,  Robinson  &  Co.,  here  represents  the  original  pur- 
chaser or  discounter  of  the  bill.  This  is  generally  a  bank  or  a 
discounting  house. 

This  draft  when  accepted  by  the  drawee,  the  National  City 
Bank,  will  be  stamped  across  the  face  ACCEPTED,  date  of  ac- 
ceptance, stamped  signature  of  the  National  City  Bank,  wi 
signature  of  the  authorized  officer  of  the  Bank. 


432  INTERNATIONAL  COMMERCE 

Specimen  of  a  draft  drawn  in  America  and  accepted 
by  a  bank. 

Exchange  for  $5,500. 

New  York,  August  10,  1919. 

Ninety  days  after  sight  of  this  FIRST  of  Exchange 
pay  to  the  order  of  Ourselves 

FIVETHOUSAND  FIVEHUNDRED  DOLLARS 

Value   received   against   merchandise   per   SS.   "China" 
A/C  of  Brown,  Green   &  Co.,  Philadelphia,  Pa. 

Drawn  under  credit  National   City  Bank,  New  York, 
No.  9876,  July  1,  1919 

To  National  City  Bank, 
New  York. 

(Signature) 

"he  bank's  acceptance  is  stamped  on  the  instrument 
as  in  the  foregoing  specimen. 

The  drawer  here  signs  the  bill  and  draws  it  under  a  credit 
which  Brown,  Green  &  Co.  have  arranged  with  the  bank.  The 
maker  has  the  draft  accepted  and  either  sells  it  or  discounts  it 
and  receives  payment  for  chemicals  sold  to  Brown,  Green  &  Co. 
At  maturity  the  bank  will  look  to  Brown,  Green  &  Co.  direct  or 
if  the  credit  be  a  guaranteed  one,  to  the  guarantors  for  settle- 
ment. 


The  principal  provisions  of  the  Federal  Reserve  Act  and 
regulations  of  the  Federal  Reserve  Board  governing  the  dealing 
in  bank  acceptances  are  summarized  in  the  following  extracts: 

General  Statement  of  the  Acceptance  Policy  of  the 
Federal  Reserve  Board. 

The  Federal  Reserve  Bo^rd  desires  to  avoid  the  adoption 
of  rigid  regulations  covering  acceptances.  The  development  of 
an  efficient  acceptance  system  will  be  facilitated  if  the  banks  of 


FEDERAL  RESERVE  POLICY  133 

the  United  States  assimilate  and  voluntarily  adopt  the  under- 
lying principles  by  which  the  Board  must  be  guided,  without 
requiring  inflexible  rules. 

Conservation  of  the  strength  of  the  Federal  Reserve  Sys- 
tem requires : 

(a)  That  it  be  possessed  of  short  paper  well  scattered  in 
its  maturities   (not  exceeding  ninety  days)  ; 

(b)  That  when  this  paper  matures  it  can  be  actually  col- 
lected ; 

(c)  That  the  supply  of  new  paper  coming  into  the  market 
can  be  controlled  to  a  certain  degree  by  an  advance  or  decline 
in  the  rate  of  interest  at  which  bankers'  acceptances  are  bought. 

Agreements  to  grant  credits  for  an  extended  period  by  the 
purchase  of  90-day  paper  or  by  90-day  acceptances  ought  to  be 
based  upon  transactions  connected  directly  with  the  purchase 
and  sale  of  goods  and  the  intermediate  process  of  manufactur- 
ing. Credits  so  extended  should  relate  to  the  (liquid)  resources 
of  the  borrowing  concern  and  should  not  be  granted  for  the 
purpose  of  furnishing  working  capital  or  for  the  temporary 
financing  of  permanent  investments. 

These  transactions  should  be  of  an  individual  character. 
They  call  for  direct  contact  between  banker  and  borrower,  and 
syndicate  credits  should  be  avoided.  Agreements  by  bankers  to 
furnish  one  or  two  year  money  at  a  definite  rate  of  interest 
against  90-day  paper  or  acceptances  to  be  used  to  finance  them- 
selves should  not  be  countenanced,  either  openly  or  in  the  form 
of  exchange  of  paper  between  bankers. 

Syndicate  acceptance  credits.  The  Federal  Reserve  Board 
has  issued  a  memorandum  stating  its  policy  in  dealing  with  ac- 
ceptances drawn  under  credits  extending  over  a  period  of  one 
or  two  years. 

In  this  memorandum  the  Board  authorized  the  banks  of 
New  York,  during  a  period  which  may  be  declared  ended  at  any 
time,  to  proceed  upon  certain  principles  which  may  be  summed 
up  as  follows : 

1.  Acceptance  credits  opened  for  periods  in  excess  of  90 
days  should  only,  in  exceptional  cases,  extend  over  a  period  of 
more  than  one  year,  and  in  no  case  for  a  time  exceeding  two 
years. 


434  INTERNATIONAL  COMMERCE 

2.  Banks  which  are  members  of  groups  opening  these  cred- 
its should  not  buy  their  own  acceptances,  and  where  an  agree- 
ment is  made  with  the  drawer  for  purchase  of  acceptances  for 
future  delivery,  the  rate  should  not  be  a  fixed  one,  but  should 
be  based  upon  the  rate  ruling  at  the  time  of  the  sale. 

3.  Transactions  covered  by  these  credits  should  be  of  a 
legitimate  commercial  nature,  and  acceptances  must  be  eligible 
according  to  the  rules  and  regulations  of  the  Board. 

4.  Whenever  syndicates  are  formed  for  the  purpose  of 
granting  acceptance  credits  for  more  than  moderate  amounts. 
Federal  reserve  banks  should  be  consulted  with  regard  to  the 
transaction.  The  question  of  eligibility,  both  from  the  stand- 
point of  the  character  of  the  bill  and  of  the  amount  involved, 
will  be  passed  upon  by  the  Federal  reserve  bank  subject  to  the 
approval  in  each  case  of  the  Federal  Reserve  Board. 

It  must  be  understood  in  passing  upon  these  transactions 
that  not  only  quality  but  also  quantity  must  be  the  controlling 
factors.  The  aggregate  of  these  acceptances  should  not  be  per- 
mitted to  constitute  the  greater  proportion  of  outstanding  ac- 
ceptances at  any  time,  and  it  must  be  understood  that  while  the 
Federal  Reserve  Board  might  look  with  favor  upon  a  transac- 
tion as  long  as  the  total  amount  involved  is  not  excessive,  trans- 
actions of  exactly  the  same  character  may  be  ruled  out  whenever 
the  aggregate  amount  of  outstanding  acceptances  of  this  char- 
acter becomes,  in  the  opinion  of  the  Federal  Reserve  Board, 
unduly  large. 

Rediscounts   with   Federal   Reserve   Banks. 

Member  banks  of  the  Federal  Reserve  System  are  author- 
ized to  rediscount  notes,  drafts,  bills  of  exchange,  and  ban-, 
acceptances  with  Federal  reserve  banks  under  the  following  pro- 
visions of  the  Federal  Reserve  Act : 

"Upon  the  indorsement  of  any  of  its  member  banks,  which 
shall  be  deemed  a  waiver  of  demand,  notice,  and  protest  by  such 
bank  as  to  its  own  indorsement  exclusively,  any  Federal  reserve 
bank  may  discount  notes,  drafts,  and  bills  of  exchange  arising 
out  of  actual  commercial  transactions;  that  is,  notes,  drafts,  and 
bills  of  exchange  issued  or  drawn  for  agricultural,  industrial,  or 


BEDISCOUNTING    DRAFTS  ».;:, 

commercial  purposes,  or  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  for  such  purposes,  the  Federal  Reserve  Bi 
to  have  the  right  to  determine  or  define  the  character  of 
paper  thus  eligible  for  discount,  within  the  meaning  of  this  Act. 
Nothing  of  this  Act  contained  shall  be  construed  to  prohibit 
such  notes,  drafts,  and  bills  of  exchange,  secured  by  staple  agri- 
cultural products,  or  other  goods,  wares,  or  merchandise,  from 
being  eligible  for  Mich  discount;  but  such  definition  shall  nol 
include  notes,  drafts,  or  bills  covering  merely  investments  or 
issued  or  drawn  for  the  purpose  of  carrying  or  trading  in  stocks, 
bonds,  or  other  investment  securities,  except  bonds  and  notes 
of  the  Government  of  the  United  States.  Notes,  drafts,  and  bills 
admitted  to  discount  under  the  terms  of  this  paragraph  must 
have  a  maturity  at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace:  Provided,  that  notes,  drafts, 
and  bills  drawn  or  issued  for  agricultural  purposes  or  based  on 
live  stock  and  having  a  maturity  not  exceeding  six  months,  ex- 
clusive of  days  of  grace,  may  be  discounted  in  an  amount  to  be 
limited  to  a  percentage  of  the  assets  of  the  Federal  reserve  bank, 
1o  be  ascertained  and  fixed  by  the  Federal  Reserve  Board. 

"The  aggregate  of  such  notes,  drafts,  and  bills  bearing  the 
signature  or  indorsement  of  any  one  borrower,  whether  a  per- 
son, company,  firm,  or  corporation,  rediscounted  for  any  one 
bank,  shall  at  no  time  exceed  ten  per  centum  of  the  unimpaired 
capital  and  surplus  of  said  bank ;  but  this  restriction  shall  not 
apply  to  the  discount  of  bills  of  exchange  drawn  in  good  faith 
against  actually  existing  values. 

"Any  Federal  reserve  bank  may  discount  acceptances  of  the 
kinds  hereinafter  described,  which  have  a  maturity  at  the  lime 
of  discount  of  not  more  than  three  months'  sight,  exclusive  of 
days  of  grace,  and  which  are  indorsed  by  at  least  one  member 
bank." 

(Federal  Reserve  Act,  Section  13.) 

"No  Federal  reserve  bank  shall  be  permitted  to  discount 
for  any  (member)  State  bank  or  trust  company  notes,  drafts, 
or  bills  of  exchange  of  any  one  borrower  who  is  liable  for  bor- 
rowed money  to  such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  centum  of  the  capital  and  surplus  of  such 


436  INTEENATIONAL  COMMERCE 

State  bank  or  trust  company,  but  the  discount  of  bills  of  ex- 
change drawn  against  actually  existing  value  and  the  discount 
of  commercial  or  business  paper  actually  owned  by  the  person 
negotiating  the  same  shall  not  be  considered  as  borrowed  money 
within  the  meaning  of  this  section.  The  Federal  reserve  bank, 
as  a  condition  of  the  discount  of  notes,  drafts,  and  bills  of  ex- 
change for  such  State  bank  or  trust  company,  shall  require  a 
certificate  or  guaranty  to  the  effect  that  the  borrower  is  not 
liable  to  such  bank  in  excess  of  the  amount  provided  by  this 
section,  and  will  not  be  permitted  to  become  liable  in  excess  of 
this  amount  while  such  notes,  drafts,  or  bills  of  exchange  are 
under  discount  with  the  Federal  reserve  bank." 
(Federal  Reserve  Act,  Section  9.) 

"No  member  bank  shall  act  as  the  medium  or  agent  of  a 
nonmember  bank  in  applying  for  or  receiving  discounts  from  a 
Federal  reserve  bank  under  the  provisions  of  this  Act,  except 
by  permission  of  the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  19.) 

"The  discount  and  rediscount  and  the  purchase  and  sale  by 
any  Federal  reserve  bank  of  any  bills  receivable  and  of  domestic 
and  foreign  bills  of  exchange,  and  of  acceptances  authorized  by 
this  Act,  shall  be  subject  to  such  restrictions,  limitations,  and 
regulations  as  may  be  imposed  by  the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  13.) 

"The  Federal  reserve  banks  shall  be  authorized,  subject  to 
the  maturity  limitations  of  the  Federal  Reserve  Act  and  to  regu- 
lations of  the  Federal  Reserve  Board,  to  discount  the  direct  ob- 
ligations of  member  banks  secured  by  .  .  .  bonds  of  the  (War 
Finance)  Corporation  and  to  rediscount  eligible  paper  secured 
by  such  bonds  and  indorsed  by  a  member  bank." 

(War  Finance  Corporation  Act,  Section  13.) 

Any  federal  reserve  bank  may  discount  for  any  of  its  mem- 
ber banks  any  note,  draft,  or  bill  of  exchange  provided: 

(a)  It  has  a  maturity  at  the  time  of  discount  of  not  more 
than  90  days,  exclusive  of  days  of  grace ;  but  if  drawn  or  issued 
for  agricultural  purposes  or  based  on  live  stock,  it  may  have  a 
maturity  at  the  time  of  discount  of  not  more  than  six  months, 
exclusive  of  days  of  grace; 


BEDISCOUNTING  DRAFTS  437 

(b)  It  arose  out  of  actual  commercial  transactions;  that  is, 
it  must  be  a  note,  draft,  or  bill  of  exchange  which  has  been 
issued  or  drawn  for  agricultural,  industrial,  or  commercial  pur- 
poses, or  the  proceeds  of  which  have  been  used  or  are  to  be  used 
for  such  purposes; 

(c)  It  was  not  issued  for  carrying  or  trading  in  stocks, 
bonds,  or  other  investment  securities,  except  bonds  and  notes  of 
the  Government  of  the  United  States; 

(d)  The  aggregate  of  notes,  drafts,  and  bills  bearing  the 
signature  or  indorsement  of  any  one  borrower,  whether  a  per- 
son, company,  firm,  or  corporation,  rediscounted  for  any  one 
member  bank,  shall  at  no  time  exceed  ten  per  cent  of  the  unim- 
paired capital  and  surplus  of  such  bank;  but  this  restriction 
shall  not  apply  to  the  discount  of  bills  of  exch  drawn  in 
good  faith  against  actually  existing  values; 

(e)  It  is  indorsed  by  a  member  bank; 

(/)  It  conforms  to  all  applicable  provisions  of  this  regu- 
lation. 

Eligibility  of  notes,  drafts  and  bills  of  exchange.  The  Fed- 
eral Reserve  Board,  exercising  its  statutory  right  to  define  the 
character  of  a  note,  draft,  or  bill  of  exchange  eligible  for  redis- 
count at  a  Federal  reserve  bank,  has  determined  that: 

(a)  It  must  be  a  note,  draft,  or  bill  of  exchange  the  pro- 
ceeds of  which  have  been  used  or  are  to  be  used  in  producing, 
purchasing,  carrying,  or  marketing  goods  in  one  or  more  of  the 
steps  of  the  process  or  production,  manufacture,  or  distribution; 

(b)  It  must  not  be  a  note,  draft,  or  bill  of  exchange  the 
proceeds  of  which  have  been  used  or  are  to  be  used  for  per- 
manent or  fixed  investments  of  any  kind,  such  as  land,  build- 
ings, or  machinery; 

(c)  It  must  not  be  a  note,  draft,  or  bill  of  exchange  the 
proceeds  of  which  have  been  used  or  are  to  be  used  for  invest- 
ments of  a  purely  speculative  character; 

(d)  It  may  be  secured  by  the  pledge  of  goods  or  collateral, 
provided  it  is  otherwise  eligible." 

(Regulations  of  Federal  Reserve  Board,  Regulation  A,  Series  of  19J  7 
A,  II.) 


i     I  i  .,      kTIONAJ     I  OMMERCJ 

Open  market  transactions.  "An)  Federal  reserve  bank  may, 
under  rules  and  regulations  prescribed  by  the  Federal  Reserve 
Board,  purchase  and  sell  in  the  open  market,  at  home  or  abroad, 
either  from  or  to  domestic  or  foreign  banks,  firms,  corporations, 
or  individuals,  cable  transfers  and  bankers'  acceptances  and  bills 
of  exchange  of  the  kinds  and  maturities  by  this  Act  made  eligible 
for  discount,  with  or  without  the  indorsement  of  a  member 
bank. 

"Every  Federal  reserve  bank  shall  have  power  ...  to  pur- 
chase from  member  banks  and  to  sell,  with  or  without  its  in- 
dorsement, bills  of  exchange  arising  out  of  commercial  trans- 
actions, as  hereinbefore  defined " 

(Federal  Reserve  Act,  Section  14.) 

4.     Bank  Acceptances  and  the  Discount  Market. 

Prior  to  the  enactment  of  the  Federal  Reserve  Act  National 
Banks  in  America  were  not  authorized  to  accept  time  drafts 
drawn  upon  them,  and.  it  was  their  practice  to  arrange  with  for- 
eign banks,  mainly  in  London,  to  accept  for  them  against  their 
guarantee.  Only  by  such  means  were  the  American  banks  en- 
abled to  furnish  the  complete  banking  service  required  by  their 
clients.  A  few  state  banks  were  allowed  to  accept  such  time 
bills,  but  the  lack  of  an  open  discount  market  made  it  impossible 
for  them  to  go  into  this  business  extensively. 

As  we  have  seen,  the  Federal  Reserve  Act  introduced  a  very 
important  change  into  this  situation.  We  have  quoted  the  regu- 
lations of  the  Federal  Reserve  Board  governing  the  acceptance 
of  drafts  by  member  banks  of  the  Federal  Reserve  System.  We 
may  summarize  the  purposes  for  which  this  permission  has  been 
granted  under  four  heads :  to  cover  the  exportation  and  the  im- 
portation of  commodities,  to  create  dollar  exchange,  to  finance 
domestic  shipments  of  goods,  to  carry  goods  in  warehouses  under 
certain  restrictions. 

In  a  masterly  analysis  dealing  with  American  Bank  Accept- 
ances and  Foreign  Trade,  presented  to  the  Acceptance  Council, 
Mr.  Kent  of  the  Bankers  Trust  Company  points  out  an  interest- 
ing condition  which  has  developed  in  the  American  acceptance 


KENT  ON  ACC]  I 

business  due  to  the  exigencies  of  the  war  and  the  initial  period 
of  reconstruction : 

Properly  a  banker's  acceptance  should  he  paid  at  maturity 
without  renewals.  In  the  early  part  of  the  war,  however,  a  con- 
dition developed  which  made  it  necessary  for  the  United  States, 
if  it  would  maintain  its  exports  to  Europe,  to  advance  dollars 
to  the  Allies.  It  was  found  that  the  Anglo-French  loan,  and 
other  issues  of  similar  securities,  were  not  sufficient  to  cover  re- 
quirements, and  a  series  of  credits  was  established  under  which 
foreign  institutions,  more  particularly  French,  drew  upon  Amer- 
ican banks  at  90  days  sight,  with  the  privilege  of  three  renewals, 
to  cover  exports  from  the  United  States.  The  Federal  Reserve 
Board  recognizing  the  emergency  need  ruled  that  such  accept- 
ances were  eligible  for  purchase  by  Federal  Reserve  Banks. 
Since  .the  armistice  this  form  of  credit  to  cover  the  exportation 
of  goods  from  the  United  States  to  Europe  has  been  under  con- 
sideration in  connection  with  the  trade  of  a  number  of  European 
countries.  The  desire  at  the  moment  for  such  credits  is  due  to 
the  fact  that  Europe  is  not  in  position  to  export  sufficient  goods 
to  meet  her  imports,  and  until  her  industries  and  trade  pick  up 
she  cannot  obtain  dollars  to  pay  for  raw  materials  needed  from 
the  United  States.  Through  the  establishment  of  90  day  sight 
credits,  with  three  renewals,  covering  a  period  of  one  year,  it 
is  hoped  that  the  condition  will  change  sufficiently  to  enable  pay- 
ment at  final  maturity. 

Under  ordinary  conditions  American  banks  would  not  be 
called  upon  to  issue  acceptance  credits  to  pay  for  exports  from 
the  United  States.  An  acceptance  credit  must  be  established 
by  the  buyer  of  the  goods  directly  or  indirectly.  On  that  account 
it  is  natural  and  proper  that  buyers  should  go  to  their  own 
bankers  for  their  credits,  for  their  standing  is  better  known,  their 
business  can  be  followed  more  closely,  and  a  better  hold  can  be 
had  by  such  bankers  on  goods  purchased.  The  local  banker  of 
the  importer,  therefore,  is  usually  the  one  called  upon  to  issue 
credits,  and  where  exchange  on  his  own  country  is  marketable 
by  the  exporter  at  satisfactory  rates,  such  hanker  will  naturally 
issue  a  Letter  of  Credit  in  the  money  of  the  country  of  the  im- 
porter rather  than  in  that  of  the  exporter.  Tt  is  only  when  his 
own  exchange  is  at  a  heavy  discount  in  the  country  of  the  ex- 


440  INTEENATIONAL  COMMERCE 

porter  that  the  banker  of  the  importer  is  called  upon  to  issue 
a  credit  in  the  money  of  the  exporter,  or  of  some  other  country 
whose  money  is  quickly  marketable  to  the  exporter. 

For  instance,  a  French  importer  of  cotton  before  the  war 
went  to  his  French  banker  and  obtained  acceptance  credits  in 
francs  at  say  60  or  90  days  to  pay  for  imports  of  cotton  from 
the  United  States.  The  American  exporter  was  given  the  name 
of  the  French  bank  on  which  he  was  to  draw  his  drafts  in 
francs.  Such  a  credit  was  entirely  satisfactory  to  the  Amer- 
ican exporter,  as  there  was  a  wide  market  for  French  francs  in 
the  United  States  and  he  could  sell  his  bill  of  exchange  on  the 
French  bank  for  dollars  to  any  one  of  many  American  institu- 
tions, which  are  actively  competing  for  franc  exchange.  While 
the  exporter  drew  his  bill  in  francs,  he  nevertheless  received 
dollars,  which  he  required  to  continue  his  business,  and  such 
dollars  were  immediately  available  through  the  sale  of  his  franc 
bill  to  American  bankers  even  before  acceptance.  Exporters  of 
cotton  in  the  United  States  had  no  difficulty  in  selling  such  bills 
of  exchange  with  bills  of  lading  for  the  cotton  attached  as  col- 
lateral, even  though  they  had  comparatively  little  capital  and  the 
bill  of  exchange  could  not  be  presented  to  the  French  bank  for 
acceptance  for  ten  days  or  so. 

With  French  exchange  in  the  United  States  at  the  heavy 
discount  that  exists  to-day,  together  with  the  rapidity  of  its  fluc- 
tuations, the  American  exporter  is  not  satisfied  to  accept  a  franc 
bill  of  exchange,  and  the  importer  is  required  to  furnish  a  dollar 
acceptance.  This  he  does  again  through  his  French  banker,  but 
instead  of  the  French  banker  agreeing  to  accept  a  bill  drawn 
upon  him  in  francs,  he  must  arrange  with  his  American  bank- 
ing correspondent  to  accept  a  draft  drawn  upon  such  correspon- 
dent in  dollars.  Before  doing  so,  however,  it  is  essential  that 
the  French  banker  assure  himself  that  he  can  obtain  the  dollars 
at  maturity  of  the  draft,  and  before  the  American  correspondent 
will  issue  the  credit,  he  must  also  be  satisfied  that  the  French 
banker  is  going  to  be  able  to  obtain  the  dollars  at  maturity.  The 
French  banker  recognizing  the  risk  involved  in  the  dollar  ex- 
change rate  may  not  be  willing  to  issue  the  credit  for  the  French 
importer.  He  is  between  two  fires — the  French  importer  may 
not  be  able  to  pay  him  the  extra  cost  of  the  dollars  at  maturity 


PROVIDING  DOLLAR  CREDITS  441 

of  the  acceptance,  and  the  French  banker  may  not  be  able  to 
obtain  the  dollars  at  any  rate. 

As  it  is  as  necessary  and  valuable  to  the  American  exporter 
to  sell  his  cotton  as  it  is  to  the  French  importer  to  purchase  it, 
under  such  conditions  the  exporter  naturally  tries  to  co-operate 
with  the  importer  to  develop  some  method  under  which  trans- 
actions can  be  safely  carried  out.  Pressure  is  therefore  brought 
upon  the  American  banks  by  the  American  exporters,  and  the 
developing  of  a  credit  arrangement  which  under  normal  con- 
ditions would  take  place  entirely  in  France  is  thrown  upon  this 
country,  for  it  is  only  upon  the  willingness  of  American  bankers 
to  extend  the  credits  that  exporters  can  make  their  sales,  and 
that  the  importers  will  be  in  position  to  indirectly  furnish  the 
credits. 

Before  American  banks  were  authorized  to  accept  time  bills 
drawn  upon  thern*it  was  necessary  for  importers  in  the  United 
States  to  arrange  with  their  American  bankers  to  engage  with 
some  foreign  banker  to  accept  for  their  account  in  order  to  car- 
ry on  their  business.  The  importer  of  coffee  from  Brazil  ar- 
ranged, therefore,  with  his  New  York  or  New  Orleans  banker 
to  issue  a  Letter  of  Credit  on  a  London  bank,  authorizing  such 
bank  to  accept  bills  of  exchange  drawn  at  say  90  days  sight, 
that  might  be  issued  in  Brazil  against  shipments  of  coffee  to  the 
United  States.  Where  the  American  bank  was  well  known  in 
Brazil,  its  letter  authorizing  the  drawing  on  the  London  bank 
of  the  bill  of  exchange  in  Brazil  against  coffee  was  sufficient  to 
finance  the  shipment,  otherwise  the  exporter  required  a  confir- 
mation of  the  letter  from  the  London  bank  stating  that  it  would 
accept  the  bill  of  exchange  upon  presentation.  All  such  bills 
of  exchange  were  drawn  in  sterling,  and  went  into  the  London 
market,  where  they  were  discounted  or  held  until  maturity  as 
money  market  conditions  determined. 

Since  American  banks  have  been  able  to  accept,  instead  of 
issuing  Letters  of  Credit  upon  their  London  correspondents  for 
the  importation  of  coffee,  they  have  issued  letters  agreeing  to 
accept  bills  drawn  upon  them  in  dollars  at  say  90  days  sight. 
Such  a  credit  is  exactly  as  good  to  the  Brazilian  exporter  as  a 
sterling  credit,  provided  the  Brazilian  banker  will  give  him  local 
currency  in  exchange  for  his  bill  upon  demand,  and  for  the  same 


te-J.  INTERNATIONAL  «  OMMERCE 

amount  that  he  would  receive  for  a  bill  of  exchange  drawn  under 
a  sterling  credit.  A  bill  of  exchange  drawn  upon  an  American 
bank  in  dollars,  therefore,  will  only  serve  its  purpose  and  place 
the  American  importer  in  position  to  buy  goods  in  a  foreign 
country  by  means  of  such  bill  of  exchange  when  there  is  a  proper 
market  for  dollar  exchange  in  the  country  of  the  exporter,  which 
must  cover  time  bills  as  well  as  demand. 

A  bill  of  exchange  drawn  on  London  at  90  days  sight  could 
always  be  turned  into  cash  at  a  known  rate,  which  could  be  as- 
certained in  foreign  countries  before  bills  were  purchased.  In 
order  to  meet  this  condition,  the  Federal  Reserve  Bank  of  New 
York "  has  established  so-called  "forward  discount  rates"  for 
dollar  acceptances,  so  that,  for  instance,  bankers  in  Argentine 
and  Brazil  who  have  had  dollar  acceptance  offered  to  them  knew 
that  upon  the  arrival  of  the  bills  in  New  York  20  or  30  days  after 
their  purchase  they  could  be  discounted  at  certain  agreed  rates. 
Exporters  from  those  countries  have,  therefore,  since  the  estab- 
lishment of  forward  rates  been  in  position  to  obtain  local  cur- 
rencies for  their  dollar  bills  of  exchange  at  actual  discount  rates, 
instead  of  rates  including  an  insurance  to  the  banks  aimed  to 
cover  possible  fluctuations  in  the  New  York  discount  rate  while 
the  bills  were  in  transit. 

If  it  should  so  happen  after  exchange  conditions  become 
normal  that  at  a  certain  period  the  London  discount  rate  for  ac- 
ceptances is  say  3%,  whereas  the  New  York  rats  is  say  41//2°/g, 
there  will  be  times  when  exchange  conditions  in  the  foreign  coun- 
tries covering  sterling  and  dollars  are  right  that  the  exporter 
will  prefer  a  sterling  bill,  even  though  we  might  have  a  market 
for  acceptances  in  New  York  as  largely  developed  as  that  in 
London.  The  acceptance  of  arbitrage  opportunities,  however, 
by  bankers  would  have  a  tendency  to  equalize  the  differences  in 
the  discount  rates  by  causing  a  fall  in  sterling,  but  the  market 
for  futures,  that  is  sterling  and  dollar  exchange  for  delivery 
60  or  90  days  ahead,  would  also  have  an  influence  on  the  situa- 
tion. 

Mr.  Kent  concludes  his  presentation  by  an  urgent  counsel 
to  the  Federal  Reserve  Board  to  bring  about  a  broader  develop- 
ment of  the  discount  market: 

Before  the  war  the  foreign  trade  of  the  United  States,  both 


BROADER  ACCEPTANCE  MABKET  443 

exports  and  imports,  was  financed  by  foreign  banking  institu- 
tions. While  American  banks  guaranteed  the  acceptances  of  for- 
eign banks  given  for  our  imports,  yet  their  names  did  not  ap- 
pear upon  the  paper,  and  the  bills  of  exchange  were  drawn  in 
other  moneys,  principally  sterling. 

Since  the  law  has  authorized  American  banks  to  accept  time 
bills  drawn  upon  them,  this  situation  has  been  reversed,  and 
to-day  American  institutions  are  not  only  financing  our  own  for- 
eign trade  covering  both  exports  and  imports,  but  that  between 
various  other  countries  as  well.  The  rapid  development  of  this 
change  in  financing  was  only  made  possible  because  of  various 
war  restrictions  upon  trade  and  commerce,  and  the  favorable 
geographical  position  of  the  United  States  in  connection  with  the 
seat  of  the  war.  After  peace  has  been  declared,  there  is  good 
reason  to  believe  that  this  country  will  be  able  to  retain  the  finan- 
cing of  its  own  imports  through  American  bankers  acceptances 
with  a  growing  increase  in  the  use  of  such  paper  to  cover  ex- 
ports from  one  foreign  country  to  another  foreign  country. 
This  condition  presupposes  the  continued  growth  of  an  accept- 
ance market  in  this  country,  for  without  that  we  cannot  expect 
to  hold  the  financing  of  our  imports  with  American  bankers  ac- 
ceptances, even  though  this  is  the  natural  way  for  such  busi- 
ness to  be  carried  on.  The  use  of  American  bankers'  acceptances 
in  our  export  trade  may,  of  course,  be  withdrawn  in  part  as 
normal  world  conditions  develop  unless  dollar  exchange  obtains 
a  favored  place  in  the  world's  exchange  market. 

It  should  be  the  constant  study  of  the  officers  of  every  Fed- 
eral Reserve  Bank  to  encourage  the  development  of  a  market 
for  bankers'  acceptances  in  their  districts,  and  they  should  have 
the  active  co-operation  of  all  bankers  and  business  men.  The 
result  of  such  united  effort  is  certain  to  increase  the  standing  of 
American  financial  institutions  throughout  the  world,  which  will 
be  surely  followed  by  increased  trade  benefits. 

Immeasurable  as  have  been  the  benefits  of  the  use  of  bank 
acceptances  in  America  since  their  authorization  by  the  Federal 
Reserve  Act  and  by  the  regulations  of  the  Federal  Reserve 
Board,  both  the  acceptance  business  and  the  operation  of  a  dis- 
count market  based  thereon  have  by  no  means  reached  the  fulness 
of  their  development.   The  foremost  financial  minds  of  the  country 


444  INTEENATIONAL  COMMERCE 

are  devoting  earnest  attention  to  the  elaboration  of  measures 
designed  to  remedy  conditions  which  are  not  yet  perfect.  The 
American  Acceptance  Council  is  an  organization  which  has  taken 
up  the  work  of  developing  the  use  of  the  bank  and  the  trade 
acceptance  as  credit  instruments  in  international  and  in  domestic 
commerce  respectively.  At  the  last  convention  of  this  body  held 
in  Detroit  on  June  9,  1919,  vice-president  Rovensky  of  the  Na- 
tional Bank  of  Commerce  submitted  an  analytical  study  of  the 
acceptance  as  the  basis  of  the  American  discount  market,  and 
the  outline  of  this  speech  deserves  a  very  carefull  perusal  by 
every  student  of  the  banking  situation  in  America  as  relating  to 
to  the  financing  of  shipments: 

1.  The  most  important  function  of  a  discount  market  is 
that  it  operates  as  a  central  clearing  house  for  bills,  in  which 
individual  banks  may  regulate  their  investment  and  cash  posi- 
tion. The  discount  market,  to  be  properly  useful,  must  be  of  suf- 
ficient breadth,  so  that  a  bank  may  be  able  to  purchase  therein 
such  amount  of  bills  as  it  requires  to  properly  balance  its  invest- 
ment and  cash  position  with  the  full  assurance  that,  should  its 
position  become  altered  at  any  time  in  the  future,  it  can  re-enter 
the  market  as  a  seller  and  readily  dispose  of  such  bills  without 
materially  affecting  current  discount  quotations.  This  naturally 
necessitates  a  broad  market  in  which  a  large  volume  of  bills  is 
constantly  being  handled  and  which  can  readily  take  or  furnish 
a  substantial  quality  of  bills  without  heavy  fluctuations  in  its 
rate  of  discount. 

2.  A  broad  discount  market  operates  as  an  equaliser  of  in- 
terest rates  between  different  sections  of  the  country.  If  in  one 
district  the  banks  have  surplus  funds,  their  purchases  of  bills  in 
the  discount  market  will  tend  to  keep  interest  rates  in  that  dis- 
trict up  to  the  level  of  the  other  districts.  In  like  manner,  if  in 
a  district  interest  rates  begin  to  rise  above  the  level  of  the  other 
districts,  the  banks  of  that  section,  by  selling  their  holdings  of 
bills  in  the  discount  market,  would  tend  to  keep  interest  rates 
approximately  at  the  level  of  the  other  districts.  It  must  be  un- 
derstood, of  course,  that  to  some  extent  inequalities  in  interest 
rates  between  various  districts  would  continue,  but  these  in- 
equalities would  not  be  as  broad  as  they  are  at  present.  The 
inequalities  would  be  limited  to  such  difference  in  interest  rat 


DISCOUNT   MARKET   FUNCTIONS  445 

as  the  average  bank  is  willing  to  forego  rather  than  change  its 
position  by  purchases  or  sales  of  bills  in  the  market.  As  time 
progresses  and  banks  become  more  accustomed  to  dealing  in  the 
discount  market,  this  difference  would  tend  to  become  as  small 
as  it  is  in  European  countries  enjoying  highly  developed  dis- 
count markets. 

3.  The  discount  market  operates  as  an  equalizer  of  interest 
rates  between  the  United  States  and  foreign  countries  very  much 
in  the  same  manner  as  it  acts  in  equalizing  rates  between  differ- 
ent sections  of  the  same  country.  The  existence  of  a  broad, 
healthy  discount  market  in  the  United  States  would  encourage 
foreign  banks  to  purchase  our  bills  as  an  investment  when  in- 
terest rates  in  this  country  are  higher  than  abroad.  This  would 
tend  to  move  our  interest  rates  sympathetically  with  the  level 
of  interest  rates  the  world  over.  Should  our  rates  decline  un- 
duly, there  would  be  a  tendency  on  the  part  of  foreign  banks  to 
dispose  of  their  holdings  of  American  bills  and  at  the  same  time 
our  banks  would  purchase  foreign  bills  and  reduce  their  hold- 
ings of  domestic  bills,  and  thus  a  movement  toward  re-establish- 
ing an  equilibrium  between  rates  here  and  abroad  would  start. 
This  does  not  mean  that  interest  rates  here  and  abroad  would 
be  at  the  same  level,  but  it  does  mean  that  the  spread  between 
discount  rates  for  bankers'  acceptances  here  and  abroad  would 
ordinarily  not  be  as  far  apart  as  they  have  been  in  the  past. 

4.  The  functions  of  the  discount  market  as  a  stabilizer  of 
gold  movements  between  countries  may  be  considered  as  an 
after-effect  of  its  operation  as  an  equalizer  of  interest  rates  be- 
tween different  countries.  Foreign  bankers  would  grow  ac- 
customed to  having  in  their  portfolios  lines  of  American  bills 
just  as  American  banks  have  at  times  lines  of  foreign  bills.  As 
exchange  rates  advance  in  this  country — which  would  mean  that 
dollars  were  becoming  cheap  abroad — foreign  banks  would  in- 
crease their  holdings  of  American  bills  on  account  of  the  cheap 
dollar  exchange  rate,  while  American  banks  would  sell  their 
holdings  of  foreign  bills  to  profit  from  the  high  foreign  exchange 
rate.  Gold  exports  would  thus  be  warded  off  for  a  time.  Gold 
imports  would  be  retarded  by  a  reversal  of  the  process. 

5.  Preventing  unnecessary  exports  and  imports  of  gold  and 
developing  a  closer  relation   between   interest   rates   here  and 


:i..  INTEE  COMMEECE 

abroad  would  result  in  a  greater  stability  of  American  interest 
rates.  There  would  be  a  closer  connection  between  the  Amer- 
ican reservoir  of  commercial  credit  and  that  of  Europe.  Large 
bodies  are  not  subject  to  sudden  movements  to  the  same  extent 
that  smaller  ones  are.  Interest  rates  in  Europe  in  normal  times 
are  much  steadier  than  ours;  discount  rates  abroad  generally 
move  by  sixteenths  of  one  per  cent  and  on  the  whole  move  with- 
in narrow  limits. 

A  broad  discount  market  in  this  country  would  become  the 
reservoir  of  credit  with  which  similar  reservoirs  abroad  would 
be  connected.  Without  such  a  reservoir  here  we  can  have  no 
really  effective  connection  with  the  world's  money  markets  and 
would  be  subject  to  the  erratic  movements  of  interest  and  ex- 
change rates  which  are  always  a  feature  of  isolated  markets. 

6.  The  necessity  of  a  standardized  instrument  of  credit  to 
the  existence  of  a  discount  market  is  so  self-evident  tliat  a 
lengthy  explanation  is  not  necessary.  The  Federal  Reserve  Act, 
by  introducing  the  bank  acceptance  into  our  banking  mechanism, 
has  furnished  us  the  instrument  we  lacked.  In  a  bank  accept- 
ance the  element  of  credit  risk  has  substantially  been  eliminated 
by  the  signature  of  a  bank  of  unquestioned  standing,  and  to  this 
signature  is  added  the  responsibility  of  the  drawers  and  subse- 
quent indorsers.  A  prime  banker's  acceptance  properly  endorsed, 
therefore,  represents  absolute  safety  as  nearly  as  can  be  at- 
tained in  any  credit  instrument.  The  rate  of  discount  at  which 
such  instruments  sell  in  the  market  simply  represents  the  actual 
value  of  the  use  of  the  money  and  not,  as  in  the  case  of  the  dis- 
count of  an  ordinary  promissory  note,  the  value  of  the  use  of 
the  money  plus  a  premium  for  the  credit  risk  assumed  by  the 
lender.  In  every  country  enjoying  a  highly  developed  banking 
system  the  discount  market  is  based  upon  the  bankers'  accept- 
ance, and  the  discount  market  in  turn  is  the  fundamental  basis 
of  the  entire  money  market.  Our  brief  experience  since  the 
passage  of  the  Federal  Reserve  Act  justifies  the  opinion  that 
ultimately  our  discount  market  will  likewise  be  based  upon  the 
same  instrument — the  bankers'  acceptance. 

7.  The  component  factors  of  a  discount  market  consist: 
first,  of  the  accepting  banks  creating  the  acceptances;  second,  of 
the  banks  and  others  who  purchase  and  sell  acceptances;  third, 


DISCOUNT  MARK  POB  n. 

of  the  central  banks  of  rediscount  (in  our  case  the  Federal  re- 
serve banks)  that  operate  as  stabilizers  at  tirqes  when  their  pur- 
chases are  considered  advisable  for  the  public  interest;  and 
fourth,  of  the  discount  corporations  and  brokers — the  highly  es- 
sential middlemen. 

a)  The  accepting  banks.  In  England  a  large  part  of  the  ac- 
ceptances is  created  by  the  so-called  acceptance  houses.  The 
English  deposit  banks  have  not  in  the  past  been  as  active  in  this 
line  as  those  of  France  and  Germany. 

Our  own  experience  justifies  the  conclusion  that  the  in- 
corporated banks  of  this  country  will  be  the  main  creators  of 
acceptances.  There  is  no  valid  reason  why  they  should  not  be — 
Ihe  fact  that  they  are  operating  under  close  public  scrutiny 
gives  them  a  natural  advantage  over  most  of  the  so-called  ac- 
ceptance houses. 

The  liability  assumed  by  an  accepting  bank  is  very  much  of 
the  same  nature  as  the  liability  arising  out  of  a  deposit,  and  so 
long  as  the  total  liabilities  of  a  bank  bear  a  fair  ratio  to  its 
capital,  no  criticism  is  justified.  It  naturally  follows  that  banks 
or  bankers  that  do  not  take  deposits,  but  use  their  capital  and 
surplus  solely  for  the  purpose  of  supporting  their  acceptance 
liabilities,  may  properly  maintain  outstanding  a  much  larger  vol- 
ume of  acceptances  than  a  bank  that  is  heavily  burdened  with  a 
large  line  of  deposit  obligations.  In  this,  as  in  most  other  phases 
of  the  banking  business,  no  hard  and  fast  rules  can  be  laid  down. 
The  guiding  principle  as  to  the  amount  of  acceptances  that  a 
bank  should  have  outstanding  should  be:  first,  the  proportion  of 
the  bank's  capital  and  surplus  to  its  total  liabilities;  second,  the 
requirements  of  its  customers  for  accommodation  in  that  form ; 
and  third,  the  accepting  bank's  general  standing  and  the  market's 
readiness  to  absorb  its  acceptances  at  the  most  favored  rates. 

b)  Banks  and  oilier  purchasers  and  sellers  of  acceptances. 
The  purchasers  and  sellers  of  acceptances  constitute  the  active 
discount  market.  A  bank  that  is  a  purchaser  one  day  may  be  a 
seller  the  next.  Whether  a  bank  purchases  or  sells  acceptances 
in  the  market  should  depend  entirely  upon  its  own  individual 
cash  and  investment  position.  When  its  position  warrants  a  pur- 
chase, it  should  step  into  the  market  and  acquire  die  bills  it  needs, 
and  when  its  position  changes,  it  should  as  freelv  sell. 


448  INTERNATIONAL  COMMERCE 

c)  The  central  rediscounting  bank.  The  central  rediscount- 
ing  bank,  in  our  country  the  Federal  reserve  bank,  should  operate 
as  a  stabilizer  in  cases  where  the  situation  becomes  one  that 
is  not  equalized  by  purchases  between  banks.  There  will  be 
times  when  a  preponderant  number  of  banks  throughout  the 
country  are  sellers  of  acceptances.  At  such  times  the  Federal 
reserve  bank  should  purchase  under  such  regulations  as  it  deems 
wise,  either  from  the  member  banks  or  direct  in  the  market,  a 
certain  amount  of  bills.  On  the  other  hand  the  Federal  reserve 
bank  should  reduce  its  holdings  by  collecting  maturing  bills  with- 
out re-investing  their  proceeds  when,  in  its  judgment,  market 
conditions  and  the  public  interest  justify  such  action.  When 
buying  acceptances  most  of  the  Federal  reserve  banks,  like 
European  central  banks,  now  generally  insist  upon  a  third  sig- 
nature, that  is,  an  additional  endorsement  besides  the  drawer  and 
acceptor. 

d)  Discount  corporations  and  brokers.  Discount  corpora- 
tions and  bill  brokers  act  as  middlemen  between  the  various 
factors  of  the  discount  market.  They  perform  a  very  useful 
function  and  no  steps  should  be  taken  that  would  tend  to  curtail 
their  usefulness.  The  practice  of  banks  holding  their  own  bills 
should  not  be  encouraged.  Likewise,  the  practice  of  banks  buy- 
ing one  another's  bills  without  the  intermediation  of  a  broker  is 
undesirable  inasmuch  as  it  tends  to  retard  the  developments  of 
the  market. 

In  the  case  of  foreign  or  domestic  acceptances,  it  matters 
little  whether  the  accepting  bank,  acting  in  fact  for  the  drawer, 
or  the  latter  himself  sells  the  bill;  the  essential  part  is  that  the 
mediation  of  the  brokers  be  favored  where  possible  and  the  bill 
be  not  kept  off  the  market.  The  brokers  operate  not  only  as 
middlemen  but  their  portfolios  of  bills  constitute  the  floating  sup- 
ply without  which  a  free  open  market  would  be  impossible.  This 
floating  supply  at  times  is  naturally  far  in  excesss  of  the  finan- 
cial resources  of  the  brokers  and  consequently  some  means  must 
be  available  to  them  of  borrowing  money  at  rates  that  bear  some 
relation  to  the  level  of  the  discount  market. 

8.  Our  discount  market  is  still  in  its  infancy,  and,  while  we 
are  making  considerable  progress,  its  development  is  being  ma- 
terially retarded  by  a  number  of  factors.     The  volume  of  ac- 


KETAKDING   INi'Ll fENCEfc  **« 

ceptances  is  much  restricted  by  legislative  regulations  and  also 
by  our  comparative  inexperience  in  that  line  of  business,  which 
retards  many  of  our  banks  from  fully  utilizing  their  acceptance 
powers.  Every  acceptor  must  realize  that  banker's  acceptances 
may  finance  transactions  only  that  are  self -liquidating  within  a 
reasonably  short  time;  that  acceptance  credits  must  not  be  used 
to  finance  permanent  investments,  nor  pure  speculations,  nor  for 
the  purpose  of  furnishing  working  capital ;  that  credit  risks  must 
be  properly  distributed  and  that  acceptances  must  not  serve  to 
camouflage  excess  loans.  Acceptances  should  be  based  on  self- 
liquidating  transactions,  the  import  and  export  as  well  as  domes- 
tic sales  of  merchandise,  the  storage  of  readily  saleable  staples, 
etc.  The  latter  should  be  confined  to  raw,  basic  commodities 
that  are  stored  temporarily  as  a  part  of  the  regular  course  of 
sale  and  manufacture  and  should  not  include  commodities  stored 
for  speculative  purposes  or  finished  merchandise  awaiting  a  mar- 
ket. Adherence  to  these  and  similar  principles  should  guide  us 
in  formulating  our  own  rules  and  regulations.  Howrever,  in  view 
of  our  extensive  banking  system,  consisting  of  thousands  of  large 
and  small  banks  scattered  from  one  end  of  the  country  to  the 
other,  a  great  majority  of  whom  are  not  accustomed  to  the  use 
of  acceptances,  it  is  advisable  that  the  acceptance  business  in  the 
beginning  be  closely  regulated  both  by  law  and  practice. 

But  the  most  serious  retarding  influence  operating  against 
the  development  of  our  acceptance  market  is  our  "call  money" 
system.  So  long  as  we  have  a  call  money  market  based  upon 
stock  exchange  loans,  it  is  impossible  for  the  acceptance  discount 
market  to  become  the  important  stabilizing  medium  used  by 
banks  to  equalize  their  cash  and  investment  position.  When 
stock  exchange  call  loans  pay  a  higher  rate  of  interest  than  the 
acceptance  market,  money  will  be  withdrawn  from  the  accept- 
ance market  in  order  to  go  into  call  loans.  While  it  is  recog- 
nized that  these  call  loans  are  not  callable,  but  are  really  only 
shiftable,  they  are  much  used  at  present  as  the  main  equalizers 
of  the  cash  positions  of  the  banks.  While  stock  exchange  call 
loans  exist,  they  will  always  form  a  preponderating  part  of  the 
secondary  reserves  of  the  banks,  and  our  discount  market  will 
be  correspondingly  retarded  in  its  development. 

Another  evil  effect  of  our  present  call  money  system  is  that 


450  INTEENATIONAL  COMMEECE 

it  absorbs  the  means  by  which  the  discount  corporations  and  bill 
brokers  should  properly  be  assisted  in  carrying  their  portfolios. 
In  leading  European  countries  the  bulk  of  call  loans  are  based 
on  bills  held  by  banks  and  bill  brokers.  The  same  would  un- 
doubtedly be  true  in  this  country,  if  we  did  not  have  our  pres- 
ent method  of  daily  settlements  on  the  stock  exchange  and  the 
resultant  stock  exchange  call  loans. 

9.  Remedies  suggested.  Time  and  sound  economy  seem  to 
be  the  main  remedies  by  which  the  discount  market  can  be  re- 
lieved of  the  influence  of  Government  financing.  As  Government 
requirements  decrease,  Government  financing  will  be  reduced  in 
proportion  and  normal  conditions  will  develop.  In  all  probability 
Government  financing  will  gradually  make  way  about  as  fast  as 
our  discount  market  develops. 

a)  Call  money  market  based  on  acceptances.  The  only 
thorough  remedy  that  suggests  itself  for  the  abolition  of  the  call 
money  problem  is  the  adoption  of  fortnightly  or  other  periodical 
settlements  on  the  stock  exchange.  This  would  bring  about  the 
custom  that  prevails  in  other  countries  of  financing  the  require- 
ments of  the  stock  exchange  by  means  of  contango  or  settlement 
loans.  There  would  then  be  no  further  use  for  call  loans  based 
on  stock  exchange  collateral,  and  loans  for  stock  exchange  pur- 
poses (which  are  by  no  means  unessential  to  the  commercial 
welfare  of  the  country)  would  become  short  time  loans.  The 
bulk  of  all  call  loans  would  in  time  be  based  upon  acceptances. 
This  is  highly  essential.  The  bill  broker  and  discount  corpora- 
tions must  have  means  of  carrying  their  portfolios  of  bills  await- 
ing distribution. 

b)  Temporary  measures.  It  must  be  recognized  that  any 
alteration  in  the  method  of  settlement  on  the  stock  exchange  is 
a  step  that  will  require  much  time  and  thought.  In  the  mean- 
time the  development  of  our  discount  market  should  not  wait. 
Some  temporary  steps  should  be  taken  to  provide  the  bill  brokers 
with  funds  to  carry  their  portfolios  without  loss  to  them.  This 
is  a  step  that  is  of  importance  to  every  bank  in  the  United  States. 
Every  bank  is  more  or  less  interested  in  the  development  of  a 
discount  market  and  consequently  should  bear  its  share  of  this 
burden.  It  has  been  suggested  that  banks  make  call  loans  to  bill 
brokers  at  attractive  rates  based  on  the  discount  rate.     While 


SUGGESTED  EEMEDIES  451 

this  proposal  has  some  favorable  features  it  does  not  adequately 
remedy  the  situation.  It  requires  that  a  bank  be  willing  to  lend 
its  money  to  the  bill  brokers,  including  the  discount  corporations, 
usually  below  current  rates,  and  the  inevitable  cosequences 
would  be  that  such  loans  would  be  looked  upon  by  the  loaning 
bank  as  a  favor  to  the  borrowers  and  that  money  would  be 
doled  out  in  insufficient  quantities  or  would  be  doled  out  only 
to  certain  favored  parties,  etc. 

This  problem  is  too  important  to  be  handled  in  this  unsys 
tematic  and  somewhat  altruistic  way.  A  plan  should  be  adopted 
that  would  assure  the  brokers  of  always  being  able  to  obtain 
adequate  funds  and  to  levy  the  burden  equitably  upon  all  banks. 
We  have  an  agency  that  is  admirably  suited  to  this  purpose.  Sub- 
stantially all  of  the  commercial  banks  of  the  country  are  stock- 
holders and  depositors  in  the  Federal  reserve  bank.  They  con- 
tribute to  its  capital  and  by  their  deposits  of  reserve  they  con- 
tribute to  its  loanable  funds.  If  the  Federal  reserve  bank  makes 
loans  at  rates  that  are  below  the  market,  the  loss  is  distributed 
equally  over  all  the  stockholding  banks.  It  seems  thus  that 
this  is  the  agency  that  should  be  used  for  the  purpose  of  tempo- 
rarily meeting  the  difficulty  that  confronts  us.  Some  Federal 
reserve  banks  are  in  effect  making  such  loans  through  purchases 
and  sales  in  the  open  market;  but  the  law  ought  to  be  amended, 
so  as  to  encourage  the  making  of  these  loans  on  a  much  larger 
scale  and  in  a  manner  less  roundabout  than  the  present. 


With  the  foreging  review  of  American  banking  practice  we 
conclude  our  study  of  the  foreign  credit  problem.  Striking 
changes  have  occurred  in  the  nation's  relation  to  this  problem 
since  the  publication  of  the  monograph  on  "Foreign  Credits"  in 
19*3- 

At  that  time,  from  the  point  of  view  of  the  practical  ex- 
porter rather  than  that  cf  the  economist,  the  inadequacy  of  the 
American  banking  mechanism  was  the  chief  disadvantage  of 
our  position.  To-day  this  mechanism  is  much  improved,  and 
while  certain  defects  still  adhere  to  it,  provision  has  been  made 
by  legislation  to  remedy  such  defects  from  time  to  time  as  they 
are  discovered.     And  the  business  world  of  the  nation  has  not 


452  INTERNATIONAL  COMMERCE 

yet  learned  to  avail  itself  in  the  fullest  measure  of  its  various 
facilities, 

But  the  entire  foreign  credit  problem  has  long  since  passed 
into  a  new  and  most  significant  phase.  It  is  no  longer  the  paro- 
chial problem  of  an  individual  manufacturer  concerned  in  dis- 
counting of  a  draft  on  a  foreign  customer.  The  foreign  credit 
problem  has  become  one  of  national,  of  world-wide  importance. 
It  is  one  of  the  supremely  grave  economic  problems  which  are 
inextricably  bound  up  with  our  relations  to  other  countries  and 
will  stay  so  bound  up.  And  for  this  reason  it  is  a  matter  of  pro- 
found research  not  only  by  the  Department  of  Commerce —that 
branch  of  the  administration  which  is  in  direct  touch  with  the 
business  man,  but  also  by  the  Treasury  and  the  State  Depart- 
ments, for  in  one  way  or  another  it  enters  directly  or  indirectly 
into  our  relations  with  all  foreign  nations  and  into  the  conduct 
of  all  commercial  enterprises  within  the  nation. 

And  our  present  study  deals,  of  necessity,  with  a  transitory 
phase  of  the  foreign  credit  problem,  for  history  is  in  the  mak- 
ing. It  behooves,  therefore,  every  business  man  to  follow  close- 
ly the  discussions  of  this  problem  by  financial  experts  in  the  pub- 
lications and  conferences  of  the  Acceptance  Council,  the  Na- 
tional Foreign  Trade  Council  and  other  prominent  organizations. 


CHAPTER  XVIII. 

American  Commercial  Enterprises  Domiciled  Abroad. 

i.    foreign  branch  establishments  of  american  firms 

and  the  incorporation  of  subsidiary  stock 

companies  under  foreign  laws. 

Trading  and  organizing  under  varying  jurisdiction  and  in 
compliance  with  manifold  laws  is  no  novelty  to  an  American 
business  firm  even  if  engaged  exclusively  in  domestic  commerce. 
Besides  Federal  regulations  governing  certain  phases  of  com- 
mercial activity,  an  American  firm  figures  with  the  local  legisla- 
tion of  forty  eight  states.  The  legislation  in  these  states  dif- 
fers so  greatly  that  acts  which  are  perfectly  lawful  in  some  of 
them,  may  bring  the  firm  into  conflict  with  the  laws  of  others. 
At  the  same  time,  with  a  due  recognition  of  this  state  of  affairs, 
there  is  so  little  essential  difficulty  in  conducting  either  an  inter- 
state business  or  a  business  within  each  state  that  the  average 
American  manufacturer  and  merchant  is  hardly  aware  of  the 
irksomeness  of  this  lack  of  uniformity. 

This  is  very  largely  parallelled  in  international  trading: 
here  we  also  find  with  a  few  exceptions  an  essential  freedom  of 
trading  and  a  variety  of  legislation  geverning  the  methods  of 
exercising  this  fredom.  Restrictions  are  not  numerous.  Regu- 
lations as  to  form  are  many.  Before  launching  forth  upon  the 
cultivation  of  business  in  foreign  territories  on  a  scale  necessitat- 
ing the  appointment  of  a  representative  with  a  power  of  attorney 
to  act  for  them,  or  the  establishment  of  a  branch  office,  or  the 
incorporation  of  a  company  under  foreign  laws,  it  is  advisable 
that  American  manufacturers  and  exporters  should  give  a  thor- 
ough study  first  to  the  general  international  law  as  relating  to 
the  rights  of  persons,  natural  and  artificial,  and  to  the  local  regu- 
lations governing  the  establishment  of  branches  by  foreign  firms 
and  the  incorporation  of  stock  companies  in  the  countries  in 
which  they  intend  to  operate. 


454  INTEENATIONAL  COMMERCE 

As  the  result  of  manifold  transactions  of  international  char- 
acter in  commerce,  the  laws  of  various  nations  relating  to  obliga- 
tions are  brought  into  mutual  international  relationship.  Thus 
we  have  to  deal  with  conflicts  in  what  is  known  among  European 
nations  as  the  civil  law,  as  well  as  with  conflicts  in  procedure 
affecting  litigation  by  aliens  and  non-residents  in  local  courts, 
and  their  participation  in  local  insolvency  proceedings. 

International  law  deals  with  these  conflicts,  but  it  is  far 
from  being  an  exact  science  with  clearly  defined  delimitations 
and  definitions.  We  distinguish  between  international  public 
law,  of  which  the  subjects  are  the  nations  and  the  relations  be- 
tween them,  and  for  which  the  only  tribunal  had  been  in  the  past 
the  permanent  court  of  arbitration  at  the  Hague,  and  lately  a 
tentative  partial  machinery  has  been  suggested  in  the  proposed 
League  of  Nations ;  and  the  international  private  law,  of  which 
the  subjects  are  private  persons,  natural  or  artificial,  and  in 
which  local  courts  are  competent.  The  international  private  law 
must  determine  to  what  extent  aliens  are  subject  to  the  law  of 
the  land  where  they  are  domiciled  and  sojourning  or  doing  busi- 
ness, and  in  how  far  they  are  subject  to  their  own  country's 
laws,  and  the  same  for  citizens  of  the  local  state  domiciled,  so- 
journing or  doing  business  in  foreign  countries.  International 
treaties  deal  largely  with  these  matters.  In  commercial  relations 
it  appears  highly  desirable  to  unify  international  usage  with  re- 
gard to  commercial  bills,  trade-marks  and  patents,  and  the  mari- 
time law.  Until  the  Paris  conference  of  1919  neither  the  United 
States  nor  Great  Britain  had  taken  part  in  international  con- 
ferences (excepting  the  Peace  Conference  at  the  Hague  in  1899 
and  some  Pan-American  conferences)  aiming  at  such  unifica- 
tion. 

Neither  in  American  nor  in  English  usage  is  there  a  specific 
body  of  law  known  as  commercial  law,  but  in  many  other  coun- 
tries there  are  special  commercial  codes  containing  rules  differ- 
ing from  the  ordinary  rules  of  law  and  applicable  to  transactions 
between  merchants,  and  between  merchants  and  non-merchants. 
There  are  also  in  many  countries  special  commercial  courts  with 
their  own  mode  of  procedure. 

In  addition  to  commercial  laws  most  countries  recognize  the 


STATUS  OF  ALIEN  MERCHANTS  455 

existence  of  commercial  usage,  and  conflicts  among  usages  are 
dealt  with  as  conflicts  among  laws.  That  which  Is  customary  in 
practice  is  considered  as  having  the  same  force  as  though  ex- 
pressly willed  by  the  parties. 

Fortunately  there  is  a  growing  tendency  to  establish  a  sub- 
stantial uniformity  of  rules  and  laws  affecting  many  phases  of 
commercial  intercourse.  Railroad  and  postal  laws,  trade-marks 
and  patents,  as  well  as  copyrights  have  been  made  the  subject  of 
uniform  agreements  between  many  states.  Indeed,  it  is  to  be 
hoped  that  even  the  subject  of  the  international  status  of  stock 
companies  will  be  regulated  by  international  treaties. 

With  regard  to  the  rights  of  foreign  merchants  modern  cus- 
tom permits  aliens  to  pursue  trade  and  industry  inland  and  to 
have  the  same  rights  of  protection  as  the  natives.  In  some  coun- 
tries this  right  is  expressly  guaranteed  in  the  commercial  code, 
as  in  Spain  and  Portugal,  while  in  others  it  is  made  contingent 
upon  similar  treatment  being  accorded  by  the  state  of  which  the 
foreign  merchant  is  citizen  or  subject.  In  some  countries  spe- 
cial exemptions  are  made  for  certain  trades  and  professions 
which  are  open  only  to  native  citizens  or  subjects,  as  for  instance 
the  druggist  trade  in  Austria  and  Russia  is  not  open  to  for- 
eigners. 

But  the  business  of  foreign  merchants  is  subject  to  regu- 
lations as  to  conduct,  the  same  as  native  merchants,  including 
the  enforcement  of  publicity  and  and  orderly  manner  of  keep- 
ing books,  etc.  In  some  countries  the  books  of  foreign  merch- 
ants may  be  kept  in  any  modern  language,  while  others  provide 
that  they  must  be  kept  in  the  language  of  the  country. 

The  status  of  artificial  persons  (corporations,  stock  com- 
panies and  associations)  is  determined  by  the  law  of  the  place 
of  their  creation,  but  if  they  operate  in  foreign  countries  they 
must  obey  ordinances  belonging  to  the  industrial  laws  of  the 
state  where  they  operate,  and  in  some  countries  they  must  ex- 
pressly obtain  official  ratification  or  authority  before  being  per- 
mitted to  operate.  European  usage  considers  partnerships  as 
artificial  persons. 

In  American  and  English  jurisprudence  it  has  been  held 


4.56  INTERNATIONAL  COMMERCE 

that  ioreign  corporations  have  no  legal  status  outside  of  the  state 
where  they  are  created,  but  their  power  to  enter  into  legal  rela- 
tions with  internal  corporations  is  not  interfered  with,  thanks 
to  the  operation  of  the  doctrine  of  comity,  the  effect  of  which 
is  that  the  powers  granted  by  the  charter  of  a  corporation  created 
in  a  foreign  country  are  recognized  if  consistent  with  the  laws 
and  policy  of  the  state  where  the  foreign  corporation  desires  to 
operate. 

Under  the  rules  of  most  European  countries  a  branch  estab- 
lishment is  one  which  is  located  in  a  place  different  from  that 
of  the  principal  but  conducts  a  business  of  the  same  order.  A 
merely  technical  function,  such  as  a  factory,  does  not  constitute 
a  branch  establishment.  Neither  agencies  nor  warehouses  for 
consignment  stocks,  for  instance,  are  regarded  as  branch  estab- 
lishments. For  the  establishment  of  branches  of  foreign  houses 
many  countries  have  specific  regulations  regarding  registry,  the 
use  of  the  firm  name,  etc.,  as  will  be  pointed  out  in  detail  below. 

An  American  manufacturer  or  exporter  may  freely  trade 
with  all  countries,  provided  there  is  no  temporary  prohibition 
against  such  trading  caused  by  a  state  of  war  or  the  existence 
of  blockades,  and  provided  there  is  no  prohibition  of  the  export 
or  import  of  the  merchandise  in  which  he  trades. 

But  the  moment  he  enters  a  foreign  country  as  a  business 
entity  operating  from  that  country,  either  through  a  representa- 
tive to  whom  he  grants  a  power  of  attorney  to  act  for  him,  or 
by  opening  a  branch  establishment,  or  by  seeking  a  local  charter 
for  the  forming  of  a  company  or  association  recognized  by  the 
laws  of  the  country  where  he  desires  to  operate,  he  must  comply 
with  the  laws  of  that  country. 

Powers  of  attorney.  By  a  power  of  attorney  the  grantor,  or 
the  mandant,  gives  a  mandate  to  the  attorney,  or  mandatary.  The 
domiciliary  law  of  the  mandatary  governs  the  obligation  of  the 
mandant  within  the  scope  of  the  authority  granted.  The  man- 
datary acts  in  the  place  of  the  mandant,  and  therefore  the  latter 
must  submit  to  be  judged  in  the  same  manner  as  the  mandatary 
himself.  A  power  of  attorney  to  sue  is  governed  by  the  laws 
of  the  country  where  the  action  is  brought. 


POWERS  OF  ATTORNEY  4S7 

It  is  the  custom  to  recognize  the  intent  of  a  power  of  at- 
torney, as  expressed  in  its  wording,  rather  than  any  specified 
form.  The  power  of  attorney  to  be  recognized  abroad  must  com- 
ply with  the  following  general  directions: 

It  must  not  convey  greater  power  than  the  grantor  has  the 
right  to  convey.  It  must  bear  within  itself,  or  attached  to  it, 
the  evidence  that  the  grantor  has  the  right  to  give  the  mandate. 
If  in  granting  the  power  of  attorney,  he  acts  for  a  partnership, 
that  portion  of  the  partnership  contract  which  authorizes  him  to 
grant  powers  of  attorney  must  be  cited.  If  he  acts  for  a  cor- 
poration, an  extract  of  the  minutes  of  the  board  of  directors 
authorizing  him  to  grant  the  power  of  attorney  must  be  cited. 
The  business  entity  in  behalf  of  which  the  power  of  attorney  is 
granted  should  be  clearly  described.  If  it  be  a  corporation,  an 
extract  of  its  certificate  of  incorporation  should  be  attached. 
The  object  of  the  corporation  should  be  clearly  stated.  Any  ex- 
tracts from  the  certificate  of  the  incorporation  or  from  the  min- 
utes of  the  board  of  directors  should  be  signed  by  the  secretary 
and  every  document  should  be  sealed  with  the  official  seal  of  the 
company. 

Foreign  countries  have  no  means  of  verifying  the  signature 
of  American  firms  or  individuals.  For  this  reason  these  sig- 
natures must  be  certified,  and  the  documents  legalized  as  con- 
forming with  American  regulations  at  the  nearest  consular  office 
of  the  state  in  which  the  power  of  attorney  is  to  be  exercised. 
The  consuls  of  these  states  can  not  verify  the  signatures  of  the 
notaries  before  whom  these  documents  are  executed,  for  which 
reason  they  must  be  first  taken  either  to  the  county  clerk  or  to 
the  secretary  of  state  in  the  jurisdiction  of  which  the  notary  has 
his  certificate.  Only  then  will  the  consuls  legalize  the  power  of 
attorney. 

The  powers  of  attorney  and  all  attached  documents  should 
be  made  out  in  English,  and  a  translation  into  the  language  of 
the  state  in  which  the  power  is  to  be  exercised  should  be  added 
and  likewise  certified  at  the  proper  consulate  as  accurate  and 
exact. 

As  to  contents,  the  principal  thing  is  to  express  clearly  the 


45S  INTERNATIONAL  COMMERCE 

exten.  of  the  authority  conveyed  and  the  fact  tnat  the  grantor 
does  not  exceed  his  powers  in  granting  the  mandate. 

In  determining  the  question  whether  to  establish  his  own 
branch  office  or  merely  to  appoint  an  agent  in  a  certain  foreign 
territory  where  he  desires  to  operate,  the  manufacturer  or  ex- 
porter will  first  of  all  examine  the  commercial  advantages  or  dis- 
advantages of  both  forms  of  operation,  and  if  he  decides  to  es- 
tablish a  branch  office,  he  will  study  the  local  requirements  and 
formalities  which  apply.  A  fairly  complete  list  of  these  is  given 
below. 

With  regard  to  seeking  a  charter  under  the  laws  of  a  for- 
eign country,  the  situation  should  be  judged  very  carefully  be- 
fore a  decision  is  made.  Ordinarily  an  American  company  can 
operate  abroad  through  a  branch  office  without  the  necessity  of 
incorporating  a  subsidiary  company.  In  some  countries  legisla- 
tion may  be  enacted  at  any  time  taxing  the  entire  resources  of 
a  foreign  company.  This  may  lead  the  manufacturer  to  organize 
under  a  foreign  local  charter.  But  there  are  certain  advantages 
in  operating  as  an  American  company.  In  the  first  place  there 
is  the  diplomatic  protection  of  the  United  States  which  is  en- 
tirely forfeited  if  business  is  carried  on  under  a  foreign  charter, 
unless,  indeed,  protection  is  sought  by  the  Americans  as  indi- 
viduals. There  are  also  in  certain  countries  requirements  that 
a  certain  perecentage,  if  not  the  whole  of  the  board  of  directors 
be  natives. 

It  is  very  advisable  for  all  manufacturers  doing  an  extensive 
foreign  business  to  organize  their  export  activities  under  an 
American  subsidiary  corporation  with  a  limited  capital.  This  will 
put  the  foreign  branches  out  of  the  reach  of  improper  attempts 
to  tax  that  portion  of  the  parent  company's  capital  which  is  not 
involved  in  the  operation  of  the  branch. 

For  some  countries  it  is  advisable  to  establish  a  special  com- 
pany, as  for  instance  for  Brazil.  Thus  the  "Combined  Steel 
Company,"  operating  steel  mills  in  Pittsburgh,  with  a  capital  of 
$50,000,000,  may  organize  the  "Combined  Steel  Export  Com- 
pany," with  a  capital  of  $500,000,  and  the  "Combined  Steel  Ex- 
port Company  of  Brazil,"  with  a  capital  of  $50,000. 


FOREIGN  COMPANY  LAWS  459 

With  the  exception  of  cases  where  some  advantage  may  be 
gained  by  being  a  local  company  from  the  point  of  view  of  own- 
ing land  or  operating  factories,  or  enjoying  the  benefits  of  pre- 
ferential customs  treatment,  as  in  Canada  and  Great  Britain,  the 
better  plan  is  to  operate  as  an  American  corporation,  obtaining 
the  necessary  authorization  for  operations  in  each  country,  and 
complying  with  each  country's  requirements  as  to  publicity, 
balance  sheets,  etc. 

In  the  following  the  regulations  governing  the  establishment 
of  branches  and  the  incorporation  under  local  laws  are  given  for 
most  of  the  principal  countries. 

2.    Foreign  Trading  and  Company  Laws. 

(The  information  given  in  the  following  pages  contains  the  latest 
available  data  regarding  the  laws  and  regulations  of  the  countries  men- 
tioned, as  affecting  American  business  houses  operating  there.  Readers 
are  cautioned  that  in  the  countries  engaged  in  the  World  War  extra- 
ordinary measures  either  have  been  or  may  be  at  any  time  introduced 
which  would  render  all  information  on  the  subject  of  taxes  as  given 
below  inaccurate.  With  the  exception  of  a  few  countries  only  fragmen- 
tary information  is  given.  The  author  is  preparing  a  work  dealing  ex- 
haustively with  the  company  laws  of  all  countries  and  expects  to  have 
it  ready  for  publication  early  in  1920.  In  the  meanwhile  fuller  data 
may  be  received,  if  available,  on  application  to  the  author  care  of  the 
publishers.) 

ABYSSINIA. 

No  regulations  or  laws  have  been  promulgated  in  Abyssinia 
restricting  in  any  way  the  freedom  of  trading  by  foreign  con- 
cerns. Branches  of  American  houses  may  be  freely  established 
here.  There  is  no  incentive  or  need  for  incorporation  under 
local  laws.  The  attention  of  exporters  and  manufacturers  is  spe- 
cially called  to  this  market  which  is  very  receptive  towards  Amer- 
ican products. 

ARGENTINA. 

No  limited  liability  company  can  be  legally  constituted  in 
Argentina  without  having  its  articles  of  association  first  ap- 
proved by  the  Government  and  duly  published  before  commenc- 
ing operations.     The  Argentine  laws   provide    for  compulsory 


460  INTERNATIONAL  COMMERCE 

liquidation  of  domestic  limited  liability  companies  in  the  case 
of  loss  of  75%  of  their  nominal  capital.  The  directors  are  liable 
to  shareholders  for  further  loss,  unless  they  have  duly  apprized 
them  of  the  position  of  the  company. 

Foreign  limited  liability  companies  and  similar  corporations 
may  operate  freely  in  the  Argentine  Republic,  after  giving  proof 
to  competent  magistrates  that  they  had  been  constituted  in  ac- 
cordance with  the  requirements  of  their  country.  Thereupon 
they  must  register  a  copy  of  their  act  of  incorporation,  their 
statutes  and  other  documents  with  the  public  Registrar  of  Trade. 

All  firms  and  individuals  conducting  business  in  the  Argen- 
tine Republic  must  take  out  annual  trading  licenses,  the  costs 
varying  for  each  class  of  business. 

AUSTRIA. 

The  republic  of  Austria,  the  shrunken  residue  of  a  once 
powerful  Empire,  has  as  yet  not  promulgated  legislation  affect- 
ing the  incorporation  of  stock  companies  or  the  establishment 
of  branches  of  foreign  concerns.  The  legislation  of  Austria  is 
as  yet  in  the  embryonic  state,  and  for  all  intents  and  purposes 
the  regulations  of  the  Austrian  Empire  are  still  in  force. 

The  Imperial  laws  of  Austria  required  all  foreign  companies 
and  firms  to  obtain  the  authorization  of  the  Austrian  govern- 
ment before  commencing  operations  in  Austria  from  a  branch 
or  an  office  within  the  limits  of  the  Austrian  Empire.  All  for- 
eign-owned enterprises  had  to  be  entered  in  the  Commercial  Re- 
gister. Each  concern  had  to  furnish  a  copy  of  its  annual  balance 
sheet,  showing  the  assets  and  liabilities  of  its  business  in  Austria 
and  Hungary.  In  connection  with  disputes  arising  between 
such  branches  and  offices  of  foreign-owned  enterprises  and  other 
firms  in  Austria,  the  Austrian  laws  prevailed.  The  names  of 
agents  authorized  to  act  for  a  foreign  firm  and  to  sign  for  it 
had  to  be  given  in  the  register  and  all  powers  of  attorney  granted 
in  this  connection  had  to  be  registered.  In  view  of  the  taxation 
to  which  all  companies  in  Austria  wili  be  subject,  there  is  no  in- 
centive for  an  American  company  to  incorporate  under  the  laws 
of  Austria. 


FOREIGN   COMPANY  LAWS  461 

BELGIUM. 

The  Belgian  company  law,  like  that  of  France,  is  based  upon 
the  Code  Napoleon.  The  Belgian  law  recognizes  the  following 
classes  of  firms  and  companies : 

i.  La  Societe  en  nom  collectif, — an  unlimited  liability  pri- 
vate company. 

2.  La  Societe  en  commandite, — a  simple  limited  partner- 
ship, capital  being  furnished  by  members  having  limited  liability. 

3.  Societe  co-operative  —  a  limited  liability  co-operative 
company. 

4.  Union  de  credit — a  special  form  for  credit  banks. 

5.  Societe  anonyme — limited  liability  joint  stock  company. 

6.  Societe  en  commandite  par  actions — an  unlimited  liabi- 
lity company  with  capital  divided  into  shares  furnished  by  mem- 
bers having  limited  liability. 

An  unlimited  liability  private  company  is  like  a  partnership 
in  the  United  States,  in  that  each  member  is  liable  for  the  entire 
indebtedness  of  the  firm. 

The  simple  limited  partnership  has  two  classes  of  partners, 
the  working  (commandite)  and  the  capitalist  (commanditaires). 
The  first  are  jointly  liable  for  the  entire  indebtedness  of  the 
firm,  while  the  latter  are  liable  only  for  the  extent  of  their  in- 
vestment. This  gives  an  opportunity  for  wealthy  investors  to 
aid  a  struggling  young  firm  without  becoming  liable  for  more 
than  the  amount  assigned  to  that  purpose.  If  that  amount  has 
been  fully  paid,  the  capitalist  partner's  liability  ends,  otherwise 
it  holds  good  for  the  unpaid  portion  of  the  investment.  The 
name  of  the  firm  must  be  composed  only  of  the  working  part- 
ners, as  the  firm  must  not  trade  on  the  credit  standing  of  its 
silent  partners.  The  latter  can  not  receive  interest  on  their  in- 
vestment until  all  the  expenses  of  the  business  have  been  paid. 
Only  working  members  can  sign  for  the  firm. 

The  co-operative  limited  liability  company  consists  of  at 
least  seven  subscribers  who  are  all  jointly  liable. 

The  Union  de  Credit  form  of  incorporation  is  of  minor  in- 
terest, being  a  form  preferably  used  by  banks  engaged  in  grant- 
ing credit. 


462  INTEENATIONAL  COMMERCE 

In  the  limited  liability  joint  stock  company  shareholders  are 
liable  only  for  the  amount  subscribed.  After  they  have  paid  their 
shares  in  full,  no  further  liability  attaches  to  them.  The  com- 
pany must  have  at  least  seven  subscribers.  The  capital  must  be 
subscribed  in  full.  The  promoters  must  take  up  all  unsubscribed 
or  unpaid  shares.  10%  of  each  share  must  be  paid  in  before 
the  company  can  commence  business.  Shares  cannot  be  trans- 
ferred until  1/5  has  been  paid.  This  must  be  proved  before  the 
notary.  First  general  meeting  must  be  held  before  the  notary 
immediately  after  the  proof  of  the  payment  of  1/5  of  the  shares. 
Subscriptions  can  be  only  received  on  special  forms.  The  shares 
are  considered  personal  property  and  are  not  subject  to  inherit- 
anc  tax.  The  company  must  use  title  Societe  Anonyme.  30  years 
is  the  limit  of  incorporation.     The  members  must  be  registered. 

An  annual  tax  of  4%  on  all  profits  must  be  paid  to  the  state 
after  the  deduction  of  all  allowances. 

All  foreign  companies  incorporated  under  foreign  laws 
with  headquarters  outside  of  Belgium  can  freely  trade  and  sue. 
If  the  headquarters  of  the  company  are  in  Belgium,  they  are 
considered  Belgian  companies  and  must  publish  full  particulars 
of  their  incorporation  and  annual  balance  sheets.  The  directors 
and  managers  in  charge  of  the  Belgian  business  must  have  the 
same  responsibility  as  if  they  were  directors  and  managers  of  a 
Belgian  company.  A  Belgian  representative  to  be  responsible 
for  taxes  must  be  appointed.  The  company  must  pay  a  tax  on 
the  amount  of  business  done  in  Belgium.  It  must  keep  books 
of  its  Belgian  branch  and  must  make  a  declaration  of  profits  no 
later  than  six  months  after  the  close  of  its  business  year.  All 
expenses,  even  the  taxes,  may  be  deducted  from  the  net  profits. 

BOLIVIA. 

All  stock  companies  whose  headquarters  are  abroad  must 
appoint  a  legal  representative  in  Bolivia,  if  they  seek  to  operate 
in  Bolivia.  The  representative  may  be  a  holder  of  a  power  of  at- 
torney, or  the  company  may  delegate  a  board  of  directors  to  act 
for  it.  All  stock  companies  must  furnish  the  Ministry  of  Trade 
(Ministerio  de  Industria)   with  a  copy  of  their  incorporation, 


FOREIGN  COMPANY  LAWS  463 

of  their  statutes,  the  names  of  the  directors,  the  amount  or  shares 
paid  in.  Foreign  stock  companies  must  furnish  these  data  duly 
legalized  by  a  consular  officer  of  Bolivia.  The  government  on 
examining  these  documents  may  authorize  the  company  to  oper- 
ate in  Bolivia.  The  stamp  taxes  will  be  paid  to  the  Bolivian 
Treasury. 

Copies  of  balance  sheets  and  lists  of  stockholders  must  be 
presented  annually  by  the  representative  or  the  board  of  the 
directors  of  the  company  within  90  days  of  the  end  of  the  com- 
pany's fiscal  year,  in  duplicate,  to  the  Ministerio  de  Hacienda  e 
Industria. 

BRAZIL. 

All  representatives  of  foreign  firms,  whether  residing  in 
Brazil  or  freely  traveling  through  Brazil  must  be  provided  with 
powers  of  attorney.  These  must  be  duly  authenticated  by 
Brazilian  consuls  in  the  country  where  the  instrument  originates. 
The  representative  can  transact  business  in  his  own  name  only, 
but  can  not  carry  on  business  for  his  firm.  Foreign  partnerships 
are  not  recognized  in  Brazil,  but  must  be  formed  locally  and 
registered  locally  to  acquire  a  status. 

In  view  of  the  peculiar  difficulties  of  carrying  on  business 
in  Brazil  in  behalf  of  a  foreign  company  or  partnership,  it  is 
advisable  to  incorporate  a  Brazilian  company  to  carry  on  busi- 
ness in  that  country. 

A  foreign  corporation  can  obtain  a  legal  status  in  Brazil  by 
applying  for  an  authorization  of  the  Brazilian  government  to 
operate  in  Brazil,  which  is  granted  by  a  certificate  of  domestica- 
tion. A  foreign  company  can  also  form  a  purely  Brazilian  cor- 
poration. 

In  the  first  case  only  one  resident  representative  is  re- 
quired who  bears  the  responsibility  for  the  conduct  of  the  com- 
pany's affairs  in  Brazil.  A  Brazilian  corporation  requires  a  board 
of  directors  and  an  advisory  committee  residing  in  Brazil.  The 
domesticated  foreign  corporation  is  entitled  to  the  diplomatic 
protection  of  the  country  of  its  origin.  Such  corporations  are 
for  the  present  exempt  from  the  payment  of  the  Brazilian  Fed- 
eral corporation  dividend  tax  of  5%.     They  pay,  however,  the 


464  INTERNATIONAL  COMMERCE 

annual  Federal  and  state  business  taxes  and  a  corporate  income 
tax  law  in  the  state  of  San  Paulo.  The  Brazilian  government 
has  the  right  to  revoke  the  certificate  of  domestication,  for  which 
reason  it  is  better  for  permanent  operations  in  Brazil  to  incor- 
porate under  Brazilian  laws. 

For  the  purpose  of  obtaining  authorization  to  operate  in 
Brazil  as  a  branch  of  an  American  corporation,  the  following 
documents,  legalized  by  a  Brazilian  consul  in  America,  must  be 
submitted : 

Copy  of  the  corporation  charter,  copy  of  the  by-laws,  ori- 
ginal act  of  incorporation  with  a  statement  of  shares  held  by 
each  subscriber,  a  special  power  of  attorney  to  petition  for  a 
certificate  of  domestication  in  Brazil  and  to  accept  changes  in 
by-laws  suggested  by  the  Brazilian  government,  general  power 
of  attorney  to  the  representative  in  Brazil  (in  duplicate),  cer- 
tificate of  a  special  resolution  by  the  board  of  directors  author- 
izing operations  in  Brazil  and  setting  aside  a  special  capital  for 
Brazilian  operations,  otherwise  the  entire  capital  of  the  com- 
pany may  be  assessed  for  stamp  and  other  taxes.  It  is  often 
advisable  to  form  a  special  corporation  in  America  entitled 
" Company  of  Brazil,"  and  to  proceed  with  the  ap- 
plication for  domestication  as  above  shown,  with  the  omission 
of  the  last-named  document.  The  certificate  of  domestication 
may  be  worded  so  as  to  cover  all  of  the  states  of  Brazil.  Besides 
the  payment  of  several  taxes  it  is  necessary  to  deposit  one  tenth 
of  the  capital  assigned  to  Brazilian  operations  in  the  Bank  of 
Brazil.  This  deposit  is  returned,  with  the  deduction  of  certain 
commissions,  after  the  formalities  are  completed. 

In  order  to  form  a  Brazilian  company  it  is  necessary  to 
have  at  least  seven  subscribers,  and  the  entire  capital  stock  must 
be  subscribed.  No  specific  authorization  of  the  Brazilian  gov- 
ernment is  required  excepting  for  the  incorporation  of  Brazilian 
corporations  for  transacting  banking  and  insurance  business  or 
for  dealing  in  foodstuffs.  The  majority  of  the  stockholders 
should  reside  in  Brazil.  The  meetings  and  the  books  of  the  com- 
pany must  be  held  and  kept  in  Brazil. 

(Extract  of  "Legal  Requirements  for  operations  of  corporations  in 
Brazil,"  by  R.  P.  Momsen,  Rio  de  Janeiro.) 


FOREIGN  COMPANY  LAWS  465 

BULGARIA 

All  foreign  corporations  doing  business  in  Bulgaria  must 
Dring  proof  that  their  incorporation  is  valid  in  their  own  home 
country.  Powers  of  attorney  granted  by  foreign  companies  to 
persons  in  Bulgaria  must  be  registered.  All  foreign  companies 
operating  in  Bulgaria  must  submit  to  Bulgarian  laws.  A  for- 
eign company  establishing  a  branch  in  Bulgaria  must  appoint  a 
local  Board  of  Directors  composed  of  Bulgarian  subjects  and 
responsible  for  the  Bulgarian  business. 

CHILE 

Foreign  firms  must  obtain  the  authorization  of  the  president 
of  Chile  before  opening  branches  in  Chile.  They  must  publish 
in  the  official  Gazette  full  details  regarding  the  partnership  com- 
position or  the  directorate  of  the  company.  Full  particulars  of 
incorporation  must  be  registered.  If  a  foreign  firm  appoints  an 
agent  in  Chile,  this  fact  does  not  need  to  be  registered.  But 
the  agent  must  register  himself  as  carrying  on  the  business. 

CHINA. 

xn  China  there  are  forty  eight  treaty  ports,  where  foreigners 
are  privileged  to  reside  for  business  purposes  under  the  juris- 
diction and  the  protection  of  the  law  courts  of  their  respective 
nationalities.  The  principal  of  these  are  Shanghai,  Tientsin, 
Hankow  and  Canton.  Hongkong  is  a  British  possession  with 
its  own  laws  and  regulations.  Foreign  companies  are  permitted 
to  incorporate  in  treaty  ports  under  the  laws  of  the  predominant 
nationality  of  their  investors  and  personnel.  Here  the  numerous 
American  state  laws  prove  a  stumbling  block,  and  the  desirability 
of  a  Federal  incorporation  law  for  concerns  engaged  in  foreign 
business  exclusively  appears  very  desirable.  Many  American 
firms  incorporate  for  China  under  the  liberal  Hongkong  law, 
but  they  are  then  compelled  to  transact  their  legal  business  in 
British  courts  and  look  to  British  diplomatic  officials  for  sup- 
port. The  Chinese  rather  distrust  the  American  state  charters, 
and  in  fact  no  American  state  incorporation  law  fully  meets 
Chinese  requirement0 


466  INTEENATIONAL  COMMERCE 

COLOMBIA. 

Foreign  partnerships  and  companies  must  register  within 
six  months  after  commencing  business  operations  within  the 
limits  of  the  republic  of  Colombia.  They  must  appoint  an  agent 
resident  in  Colombia  in  charge  of  their  branch  in  Colombia.  His 
power  of  attorney  must  be  filed. 

CUBA. 

Foreign  companies  and  partnerships  may  trade  freely  in  the 
Republic  of  Cuba,  but  must  register  full  information  about  their 
composition,  constitution,  balance  sheets  (in  case  of  companies), 
boards  of  directors,  shares  of  stock,  etc. 

CZECHOSLOVAKIA. 

This  important  new  commonwealth,  risen  from  the  ruins  of 
the  Austro-Hungarian  Monarchy,  has  not  yet  enacted  legislation 
dealing  with  incorporations  and  the  opening  of  branches  of 
American  firms.  It  is  the  tendency  in  young  countries  to  apply 
the  laws  of  the  superseded  sovereignty  insofar  as  they  are  not 
repugnant  to  the  spirit  of  the  people,  and  the  somewhat  liberal 
law  of  Austria  with  regard  to  the  right  of  foreigners  to  trade 
freely,  after  registration,  will  doubtless  he  retained  for  the  pres- 
ent and  be  followed  by  one  not  less  liberal. 

DENMARK. 

A  new  law  has  just  been  promulgated  on  the  subject  of  in- 
corporations and  of  branches  of  foreign  firms.  Details  of  this 
law  have  not  yet  been  received  in  the  United  States  at  the  time 
of  the  publication.  Under  the  old  law  a  foreign  company  could 
not  establish  a  branch  in  Denmark,  but  was  compelled  to  ap- 
point a  Danish  subject  as  agent,  registering  all  details.  The 
Danish  agent  carried  on  the  business  in  his  name. 

ECUADOR. 

Foreign  stock  companies  cannot  appoint  lawful  agents  in 
Ecuador  without  the  sanction  of  a  judge  of  the  Commercial 
court. 


FOREIGN  COMPANY  LAWS  467 

In  order  to  incorporate  under  the  laws  of  Ecuador,  the  en- 
tire stock  capital  of  the  company  must  be  subscribed.  The  in- 
corporation must  be  approved  by  the  judge  of  the  Commercial 
court.  In  case  of  a  company  undertaking  to  do  a  banking  busi- 
ness, it  must  be  subject  to  the  national  banking  laws.  An  ex- 
ecutive authorization  is  required  for  all  incorporations.  The 
authorizaton  must  be  published  in  the  press. 

FINLAND. 

The  regulations  of  the  Russian  Empire  prevailed  in  Finland 
until  it  became  an  independent  republic  subsequent  to  the  out- 
break of  the  revolution  in  Russia.  There  is  as  yet  no  news  in 
the  United  States  with  regard  to  legislation  affecting  the  incor- 
poration of  foreign  companies,  the  establishment  of  branches  by 
foreign  firms,  etc. 

FRANCE. 

The  French  law  with  regard  to  companies  and  trading  part- 
nerships was  described  in  the  author's  pamphlet  on  Commercial 
Laws  of  France  (Archibald  J.  Wolfe,  Commercial  Laws  of  Eng- 
land, Germany  and  France,  Department  of  Commerce,  Special 
Agents  Series  No.  97).  The  analysis  given  therin  still  holds 
good,  but  for  the  question  of  company  taxation,  which  is  bound 
to  change  from  time  to  time,  in  accordance  with  the  budget 
policy  of  France  in  connection  with  the  raising  of  revenue  for 
the  extraordinary  needs  of  the  nation. 

The  law  recognizes  three  principal  kinds  of  trading  associa- 
tions in  France :  ( 1 )  The  ordinary  partnership  with  a  firm  name 
(la  societe  en  nom  collectif)  ;  (2)  the  limited  partnership  (la 
societe  en  commandite)  ;  and  (3)  the  joint-stock  company  (]a 
societe  anonyme). 

The  ordinary  partnership  is  composed  of  two  or  more  part- 
ners, in  which  the  partners  are  liable  in  solido  for  all  the  debts 
of  the  firm.  The  firm  name  of  the  partnership  is  composed  of 
the  names  of  all  the  partners ;  thus,  if  the  partnership  is  formed 
between  Arnold,  Duval,  and  Berger,  the  firm  name  would  be 
"Arnold,  Duval  &  Berger."     For  simplification  it  is  ordinarily 


468  INTERNATIONAL  COMMERCE 

written  in  abbreviated  form,  as  "Arnold,  Duval  &  Co."  It  would 
be  fraud  to  insert  in  the  firm  name  the  names  of  persons  not  in 
the  firm;  this  would,  indeed,  be  giving  the  partnership  a  false 
name,  and  thus  securing  credit  under  false  pretenses. 

The  partnership  is  established  by  an  agreement  between  all 
of  the  members  of  the  firm,  either  by  a  formal  deed  drawn  be- 
fore a  notary  or  by  privately  signed  agreement. 

In  March  1919  a  law  was  promulgated  by  the  President  of 
France  providing  for  the  creation  of  a  commercial  register  with- 
in the  jurisdiction  of  every  commercial  law  court  or  civil  law 
court.  In  the  register  shall  be  enrolled  French  or  foreign  trades- 
men having  in  France  either  their  principal  establishment  or  a 
branch  or  agency ;  French  and  foreign  commercial  companies 
having  a  branch  or  an  agency  in  France. 

French  or  foreign  tradesmen  having  their  principal  estab- 
lishment in  France  shall  observe  the  following  procedure  as  pre- 
scribed in  article  4: 

Every  tradesman  shall  request,  within  the  month  of  the 
opening  of  his  business,  or  of  the  acquisition  made  by  him  of 
a  stock  in  trade,  of  the  clerk  of  the  court  in  the  jurisdiction  of 
which  lies  his  stock  in  trade  for  his  registration  in  the  commer- 
cial register.  The  applicant  shall  remit  to  the  clerk  of  the  court 
a  declaration  in  double,  on  unstamped  paper  signed  by  him.  This 
aeclaration  shall  mention : 

1.  The  family  name  and  forenames  of  the  tradesman. 

2.  The  name  under  which  he  carries  on  his  trade  and,  if 
there  be  need,  his  surname  or  pseudonym. 

3.  The  date  and  place  of  his  birth. 

4.  His  original  nationality,  and  in  the  case  of  his  having 
acquired  another  nationality,  the  mode  and  date  of  its  acquisi- 
tion. 

5.  In  the  case  of  his  being  a  foreigner,  the  date  of  the  de- 
cree which  shall  have  authorized  him  to  reside  in  France. 

6.  In  the  case  of  a  minor  or  a  married  woman  the  express 
authorization  to  trade  given  her  in  virtue  of  articles  67  and  69 
of  the  commercial  code. 

7.  The  legal  matrimonial  situation  of  the  tradesman  in  the 
cases  mentioned  in  articles  67  and  69  of  the  commercial  code. 

8.  The  object  of  the  trade. 


FRENCH  COMPANY   LAWS  409 

9.  The  situation  of  the  branch  offices  or  agencies  of  the 
business  in  France  or  abroad. 

10.  The  sign  or  name  of  the  firm. 

11.  The  family  names,  forenames,  dates  of  birth,  places  of 
birth,  as  well  as  the  nationality  of  the  attorneys,  with  all  the 
mentions  prescribed  by  the  provisions  of  4  in  the  present  article. 

12.  Commercial  establishments  previously  managed  by  the 
declarer  or  those  he  manages  within  the  jurisdiction  of  other 
law  courts. 

French,  or  foreign  traders  having  their  principal  office  abroad 
and  a  branch  office,  or  an  agency,  in  France,  shall  observe  the 
following  procedure  as  prescribed  in  article  8 : 

Any  French  of  foreign  trader  having  his  principal  office  in 
a  foreign  country  and  a  branch  office  or  agency  in  France,  shall, 
within  the  month  following  the  opening  of  that  agency  or  branch, 
have  himself  registered  in  the  clerk's  office  of  the  law  court  in 
the  jurisdiction  of  which  that  agency  or  branch  shall  be  situated. 
His  declaration  shall  contain  every  mention  named  in  article  4 
with  the  address  of  the  place  of  his  principal  office. 

Any  foreign  commercial  company,  which  shall  found  a 
branch,  or  an  agency  in  France,  shall  observe  the  following  pro- 
cedure as  prescribed  in  article  9 : 

Before  the  opening  of  such  a  branch  or  agency,  whoever 
shall  direct  it  shall  deposit  in  the  clerk's  office  of  the  law  court 
a  declaration  on  unstamped  paper  in  duplicate,  signed  by  him 
and  containing  the  amount  of  the  sums  or  bills  to  be  furnished 
by  the  shareholders  and  sleeping  partners,  his  name,  surname, 
date,  and  place  of  birth,  original  nationality,  and  in  the  case  of 
his  having  acquired  another  nationality,  the  mode  and  date  of 
its  acquisition.  Names,  forenames,  dates  and  places  of  birth, 
as  well  as  the  nationalities,  of  the  managing  directors  or  direc- 
tors named  during  the  existence  of  a  company ;  of  the  members 
of  the  councils  of  supervision  of  limited  liability  companies, 
with  all  mentions  prescribed  in  paragraph  4,  article  4. 

The  following  general  dispositions  are  to  be  noted : 

Traders  and  foreign  companies  having  several  branches  or 
agencies  in  France  shall  not  be  subjected  to  the  provisions  of 
articles  8  and  9,  save  in  the  place  where  shall  be  situated  the 
chief   of   such  branches   or   agencies.      In   places   where   other 


'470  INTERNATIONAL  COMMERCE 

branches  or  agencies  shall  be,  it  shall  suffice  that  the  trader  or 
company  be  mentioned  in  the  commercial  register  under  his  or 
its  name,  firm  style  or  denomination,  with  a  reference  to  the 
commercial  register  of  the  principal  establishment  or  of  the  cen- 
tral office. 

The  fee  for  an  entry,  or  inscription,  shall  not  exceed  I 
franc. 

The  law  provides  penalties  for  giving  inexact  information 
in  bad  faith.  These  range  from  fines  of  from  ioo  to  200  francs, 
or  imprisonment  of  from  one  to  six  months,  or  both.  It  will  go 
into  effect  three  months  after  the  publication  of  the  regulations 
of  public  administration  of  the  law.  Public  administration  regu- 
lations will  fix  conditions  under  which  the  present  law  shall  ap- 
ply to  Algeria  and  the  colonies. 

The  formalities  of  registration  and  publication  above  men- 
tioned must  be  carefully  observed,  under  penalty  of  nullity  of 
the  partnership. 

In  the  Business  Corporation  (Societe  Anonyme)  each  of 
the  stockholders  is  liable  for  the  corporate  debts  only  to  the 
amount  of  his  stock.  It  is  an  association  of  capital  and  not  of 
persons  like  the  ordinary  partnership.  Corporations  and  joint- 
stock  companies  in  France  are  governed  by  the  laws  of  July  24, 
and  August  1,  1893. 

To  constitute  a  joint-stock  company,  the  number  of  the  in- 
corporators must  be  at  least  seven.  The  joint-stock  company 
must  be  constituted  either  by  a  deed  before  a  notary  or  by  an 
agreement  under  private  signature,  made  in  two  originals.  In 
order  that  the  stock  company  may  be  validly  constituted,  it  is 
necessary  ( 1 )  that  the  capital  of  the  company  shall  be  fully  sub- 
scribed; (2)  that  each  stockholder  shall  have  paid  up  in  cash 
at  least  25  francs  per  share  if  the  amount  of  each  share  is  below 
100  francs,  or  a  quarter  of  the  stock  subscribed  for  by  him  if 
the  amount  of  each  share  is  100  francs  or  over. 

The  limited  partnership  is  an  association  which  comprises 
two  distinct  kinds  of  members.  The  one  class  is  liable  jointly 
and  severally  for  the  firm's  debts.  These  are  the  full  partners 
or  partners  under  a  firm  name  (en  nom  collectif).  The  other 
class,  which  is  only  liable  up  to  the  amount  they  have  contributed 


FRENCH  COMPANY  LAWS  471 

or  promised,  are  the  sleeping  partners   (commanditaires  or  bal- 
leurs  de  fonds). 

The  association  has  a  firm  name.  It  comprises  the  names 
of  the  members  who  are  jointly  and  severally  liable.  The  names 
of  the  sleeping  partners  need  not  figure  in  the  firm  name. 

The  sleeping  partners  are  members  and  not  lenders  of 
money.     For  that  reason : 

(i)  They  can  at  any  moment  verify  the  accounts  and  inspect 
the  management  of  the  association. 

(2)  They  have  the  right  to  a  share  of  the  profits  and  not  to 
a  fixed  interest;  their  returns  therefore  depend  upon  the  pros- 
perity of  the  association. 

(3)  If  the  association  falls  into  bankruptcy  they  can  not  claim 
as  creditors  of  the  firm,  for  they  are  absolutely  disinterested. 
If  they  were  merely  money  lenders,  they  would  be  in  the  same 
position  as  other  creditors. 

(4)  They  can  not  contend,  as  against  the  firm's  creditors, 
that  the  association  is  void.  They  can  only  invoke  this  defense 
against  their  co-partners,  namely,  the  partners  with  unlimited 
liability  and  the  partners  with  limited  liability,  i.  e.,  the  sleeping 
partners. 

It  is  natural  that  the  management  be  in  the  hands  of  those 
who  undertake  the  responsibility.  Thus  the  limited  partnership 
must  be  managed  by  the  partners  with  unlimited  liability,  or  at 
least  by  one  or  more  of  them,  unless  a  third  person  has  been 
named  in  the  articles  of  partnership.  The  silent  or  sleeping 
partner  can  not  undertake  any  act  of  management.  The  reasons 
for  this  prohibition  are :  ( 1 )  The  silent  partner  runs  only  a 
limited  risk  and,  having  the  hope  of  unlimited  profits,  would  be 
too  greatly  disposed  to  enter  into  adventurous  enterprises,  and 
(2)  third  persons  would  often  be  deceived,  because  they  would 
count  upon  the  personal  and  unlimited  responsibility  of  the  per- 
sons with  whom  they  had  directly  dealt. 

The  limited  partnership  by  shares  is  one  in  which  the  capital 
of  the  partnership  is  divided  into  shares  or  part  shares.  It  is  a 
\ariety  of  the  ordinary  limited  partnership,  the  general  rules  of 
which  are  applied.     It  is  also,  however,  subject  to  special  rules. 

The  limited  partnership  consituted  by  shares  is  established 
either  by  a  notarial  deed  or  by  agreement  under  private  signa- 


472  INTERNATIONAL  COMMERCE 

ture.  When  the  agreement  is  under  private  signature  it  is  not 
necessary  (in  contrast  with  the  requirements  in  the  case  of  the 
ordinary  partnership  or  the  ordinary  limited  partnership)  that 
the  document  be  drawn  in  duplicate  original.  Moreover,  in  order 
that  the  limited  partnership  constituted  by  shares  may  be  validly 
formed,  it  is  necessary  (i)  that  the  business  capital  be  divided 
into  shares  of  at  least  25  francs  when  the  capital  does  not  ex- 
ceed 200,000  francs,  or  shares  of  at  least  100  francs  if  the  capi- 
tal exceeds  200,000  francs;  (2)  that  the  capital  be  entirely  sub- 
scribed; (3)  that  each  shareholder  pay  in  cash  up  to  the  amount 
of  the  shares  subscribed  by  him,  when  they  do  not  exceed  25 
francs  or  that  he  pay  a  quarter  at  least  of  the  shares  when  the 
share  is  of  100  francs  or  upward.  (Art.  1  of  the  law  of  July 
24,  1867,  as  amended  by  the  law  of  Aug.  1,  1893.) 

The  full  subscription  of  the  capital  and  the  payment  of  the 
quarter  are  proved  by  a  declaration  by  the  manager  in  the  form 
of  a  notarial  document  as  in  the  case  of  the  joint-stock  company. 

The  contributions  made  otherwise  than  in  cash  and  special 
profits  are  passed  upon  by  the  general  constitutive  meeting  as 
in  the  case  of  the  joint-stock  company. 

The  limited  partnership  constituted  by  shares,  like  the 
limited  partnership  by  proportional  interest,  is  administered  by 
the  responsible  members;  that  is  to  say,  by  the  unlimited  and 
full  partners  who  sign  the  firm  name. 

The  manager  or  managers  are  held  personally,  jointly,  and 
severally  liable  for  the  debts  of  the  partnership,  and  the  share- 
holders are  liable  only  up  to  the  amount  of  their  shares,  provided 
they  have  not  participated  in  the  business. 

Formalities  Imposed  Upon  Foreign  Corporations. 

The  foreign  corporation  which  opens  a  branch  establishment 
in  France  and  conducts  business  there  has  all  the  rights  of  a 
French  corporation.  Its  attorney  or  representative  may  be  a 
Frenchman  or  a  foreigner.  Its  managers  may  be  foreigners  and 
reside  outside  of  France. 

It  has  no  special  formalities  to  fulfill  except  the  payment  of 
the  income  tax.  French  corporations  pay  this  tax  of  4  per  cent 
on  the  total  interests  or  distributed  dividends,  but  foreign  cor- 


FEANCE:   FOREIGN   CORPORATIONS  473 

porations  need  pay  it  only  up  to  the  amount  of  the  taxable  por- 
tion, namely,  die  amount  which  the  registration*)  of  the  com- 
pany fixes  as  that  part  of  the  capital  of  the  foreign  corporation 
which  is  especially  devoted  to  French  business,  and  the  tax  of 
4  per  cent  is  levied  upon  the  dividend  or  product  from  this  share 
of  capital  (the  taxable  share).     The  formalities  are  as  follows: 

(i)  The  foreign  corporation  which  wishes  to  do  business  in 
France  must  procure  the  preliminary  acceptance  by  the  Minister 
of  Finance  or  his  delegate,  the  Director  General  of  Registration, 
of  a  special  representative  responsible  for  the  payment  of  taxes 
for  which  the  company  is  liable.  This  responsible  representative 
is,  as  against  the  Treasury,  the  direct  and  personal  debtor  for 
the  taxes  of  all  kinds  which  may  be  imposed  upon  the  foreign 
corporation.  This  responsible  representative  must  be  French 
and,  moreover,  must  be  of  a  well-established  financial  standing. 
In  fact  a  majority  of  corporations  designates  as  their  "respons- 
ible representative"  one  of  the  important  financial  establishments 
of  Paris. 

(2)  The  foreign  corporation  must  deposit  in  the  Registra- 
tion Office: 

(a)  A  certified  copy  of  its  act  of  incorporation  and  of  its 
by-laws,  with  their  translation  into  French.  These  two  docu- 
ments must  be  furnished  in  duplicate  and  be  legalized  by  the 
French  consul. 

(b)  A  special  undertaking  of  the  company  to  pay  the  taxes 
and  fines  which  may  be  levied.  This  document,  the  form  of 
which  is  furnished  by  the  Registration  Office,  must  be  signed  by 
the  persons  who,  under  the  terms  of  the  by-laws,  are  empowered 
to  obligate  the  corporation,  and,  if  necessary,  stamped  with  the 
corporate  seal.  The  signatures  must  be  legalized  by  the  French 
consul.  If  the  act  of  incorporation  or  the  by-laws  do  not  deter- 
mine exactly  which  persons  have  the  right  to  sign  such  obligation 
in  the  name  of  the  corporation,  it  will  be  acceptable  to  furnish 


*)  The  word  "registration"  used  in  connection  with  the  registration 
of  corporations  is  not  used  in  the  sense  of  the  word  "registration"  in 
American  law.  The  French  "enregistrement"  simply  signifies  the  pay- 
ment of  the  necessary  tax  at  the  Bureau  of  Enregistrement,  the  Stamp- 
Tax  Office.  The  registration  of  companies,  therefore,  is  a  purely  fiscal 
question.  This  is  none  the  less  the  case  because  registration  takes  place 
in  connection  with  the  income  or  dividend  tax.  The  by-laws  and  act  of 
incorporation  must  be  filed  at  the  Burrau  of  Enregistrement  in  the  ori- 
ginal language  and  in  French   translation. 


474  INTEENATIONAL  COMMEECE 

a  resolution  of  the  board  of  directors  authorzing  and  designat- 
ing an  officer  of  the  company  (president,  secretary,  or  treasurer) 
to  sign  the  above-named  document.  The  designation  of  the 
"responsible  representative"  must  be  made  at  the  end  of  this 
undertaking. 

(c)  The  special  undertaking  of  the  "responsible  representa- 
tive" who  undertakes  to  pay  the  taxes  and  fines  which  may  be 
due  by  the  foreign  corporation. 

(3)  At  the  end  of  the  first  year  of  doing  business  the  Re- 
gistrar's Office  demands  an  affidavit  from  the  secretary  or  trea- 
surer of  the  company,  which  .  affidavit  reports  the  particular 
amount  of  business  done  by  the  corporation  in  France.  The 
Registrar's  Office,  on  the  advice  of  the  Commission  on  Movable 
Securities,  basing  itself  generally  on  the  proportion  between  the 
total  business  of  the  company  and  the  business  done  in  France, 
fixes  then  the  taxable  share  of  the  capital  which  may  be  con- 
sidered as  devoted  to  French  business;  that  is  to  say,  that  part 
of  the  total  capital  of  the  company  on  the  income  of  which  the 
tax  of  4  per  cent  is  imposed. 

It  may  be  remarked  that  the  Registrar's  Office,  the  tax  re- 
ceiver of  the  Bureau  of  Foreign  Corporations,  then  demands  a 
new  affidavit  stating  the  dividends  distributed  since  the  corpora- 
tion opened  its  branch  establishment  in  France.  The  company 
must  then  pay  the  tax  of  4  per  cent  on  the  part  of  the  dividend 
which  is  derivable  from  the  portion  of  the  capital  invested  in 
France. 

Let  us  suppose,  for  example,  an  American  corporation  hav- 
ing a  capital  of  $200,000.  If,  after  the  deposit  of  the  documents 
indicated  above,  the  registration  determined  that  the  quarter  of 
the  total  capital  ($50,000,  i.  e.,  250,000  francs)  is  to  be  con- 
sidered as  the  capital  specially  devoted  to  French  business  (the 
taxable  share)  and  if,  on  the  other  hand,  the  profits  from  this 
portion  of  the  capital  were  $10,000  (50,000  francs)  the  income 
tax  of  4  per  cent  on  these  50,000  francs  would  be  2,000  francs. 

If  the  company  shows  that  there  was  no  dividend  distri- 
buted, it  has  nothing  to  pay  unless  fraud  is  proved  and  it  be- 
comes evident  from  the  business  done  in  France  by  the  company 
that  a  dividend  must  logically  have  been  earned. 


GEEMAN  COMPANY  LAWS  475 

Documents  to  be  furnished  by  the  foreign  corporation  wish- 
ing to  do  business  in  France  are  as  follows: 

Certified  and  legalized  copy  of  the  by-laws  of  the  corpora- 
tion. 

Certified  and  legalized  copy  of  its  act  of  incorporation. 

Undertaking  of  the  company  to  pay  the  taxes  in  France  ac- 
cording to  a  certain  form  to  be  signed  by  the  persons  who  are 
authorized  to  bind  the  corporation  either  by  virtue  of  the  by- 
laws or  of  the  statute.     (Not  necessary  to  legalize.) 

Information  on  unstamped  paper  by  the  directors  of  the 
company  concerning  the  profits  of  the  last  five  years  and  on  the 
business  done  in  that  time.  (This  information  is  demanded  by 
the  Registrar's  Office  to  fix  the  amount  of  the  taxable  share.) 

The  appointment  of  the  responsible  French  representative 
chosen  by  the  company  (named  in  the  undertaking  above). 

Resolution  of  the  board  of  directors  concerning  the  capital 
devoted  to  French  business  (according  to  the  form  furnished). 

GERMANY. 

The  republic  of  Germany  has  inherited  the  legislation  of  the 
German  Empire,  but  new  legislation  may  be  confidently  expect- 
ed to  supersede  it.  All  foreign  companies  have  the  right  of  trad- 
ing in  Germany,  but  must  register  in  the  Register  of  Commerce. 
All  powers  of  attorney  must  be  registered.  The  taxation  was 
very  heavy  even  before  the  war.  It  will  be  exceedingly  heavy 
after  the  signing  of  the  peace.  Under  the  peculiar  conditions 
of  German  reconstruction  it  will  be  inadvisable  for  any  foreign 
company  either  to  incorporate  under  German  laws  or  to  establish 
branches,  as  the  business  of  such  branches  will  be  inevitably 
subject  to  the  great  strain  of  domestic  taxation. 

The  German  Imperial  Law  was  very  liberal  in  affording 
foreign  firms  the  right  of  trading  in  Germany.  An  analysis  of 
this  law  was  given  in  the  author's  work  on  Commercial  laws  of 
Germany,  (Archibald  J.  Wolfe,  Department  of  Commerce,  Spe- 
cial Agents  series  No.  97). 

Any  foreign  individual,  firm,  or  corporation  desiring  to  do 
business  in  Germany  through  the  establishment  of  a  branch  must 


476  INTERNATIONAL  COMMERCE 

comply  with  the  provisions  of  the  Commercial  Code  requiring 
registration  of  the  branch  in  the  commercial  registry  kept  in  the 
custody  of  the  jurisdictional  court.  The  registration  of  such 
a  branch  does  not  free  the  individual,  firm,  or  corporation  in 
question  from  the  obligation  to  deposit  security  for  costs  in  suits 
brought  against  persons  or  firms  in  Germany.  If  the  concern 
establishing  such  a  branch  be  a  partnership  or  corporation,  proof 
must  be  made  of  the  nature  of  such  partnership  or  corporation 
and  certified  extracts  from  the  partnership  agreement,  certificate 
of  incorporation,  and  by-laws,  respectively,  must  be  filed.  If  the 
branch  be  an  agency  not  in  the  legal  but  in  the  popular  sense 
of  the  word;  that  is,  if  some  person  or  firm  in  Germany  carries 
on  the  agency  in  his  or  its  own  name,  such  agent  is  personally 
subject  to  the  requirements  relating  to  registration,  but  the  for- 
eign firm,  since  it  is  not  the  owner  of  the  branch  or  agency,  will 
not  be  considered  as  doing  business  directly  in  Germany  and  will 
not  be  required  to  be  registered. 

Any  person  or  persons,  including  firms  and  corporations, 
whether  domestic  or  foreign,  may  do  business  in  Germany  in  any 
of  the  corporate  forms  provided  by  German  law,  of  which  the 
Aktiengesellschaft  (stock  company)  and  the  Gesellschaft  mit 
beschraenkter  Haftung  (limited  liability  company)  are  the  two 
most  popular  forms.  There  are  no  restrictions  as  to  nationality 
nor  as  to  residence  so  far  as  the  stockholders  or  shareholders 
are  concerned. 

The  Aktiengesellschaft,  or  stock  company,  is  the  nearest 
German  equivalent  to  the  American  business  stock  corporation, 
and  is  represented  by  a  Vorstand,  or  board  of  directors,  and  con- 
trolled by  an  Aufsichtsrat,  or  board  of  supervisors,  but  it  does 
not  possess  a  president,  secretary,  and  treasurer  designated  and 
elected  as  such.  This  form  of  company  is  subject  to  the  pro- 
visions of  the  German  Commercial  Code  referring  to  Aktien- 
gesellschaft. 

The  "Gesellschaft  mit  beschraenkter  Haftung"  or  Limited 
Liability  Company,  may  be  described  as  a  cross  between  an 
American  business  corporation  and  a  partnership,  partaking  as 
it  does  of  many  of  the  characteristics  of  both.  In  contemplation 
of  German  law  it  is  an  artificial  person  or  juristische  Person  and 


GERMAN    COMPANY   LAWS  477 

has  an  existence  of  its  own  separate  and  distinct  from  that  of 
its  founders  and  shareholders,  and  is  therefore  a  body  corporate. 
This  corporate  form  is  much  simpler  than  the  Aktiengesellschaft, 
or  stock  company.  Its  capital  is  not  divided  into  shares,  and  10 
certificates  of  stock  are  issued.  Individual  interests  or  holdings 
in  the  company  may  be  transferred  in  whole  or  in  prut  by  nota- 
rial or  judicial  act.  It  is  represented  in  all  matters  judicial  or 
extrajudicial  by  one  or  more  business  managers,  or  Geschaefts- 
fuehrer,  who  need  not  be  otherwise  interested  in  the  company. 
It  has  no  board  of  directors  or  board  of  supervisors,  although 
it  is  permissible  to  appoint  a  board  of  control,  somewhat  analo- 
gous to  the  stock  corporation.  The  liability  of  the  members  is 
strictly  limited  to  their  subscribed  holdings,  and  full  payment  of 
such  holdings  eliminates  all  further  liability.  Other  persons, 
firms,  and  corporations  may  be  founders  and  shareholders, 
whether  German  or  foreigners. 

In  general  this  corporate  form  is  decidedly  the  simplest  and 
best  for  branches  of  American  enterprises  in  Germany.  In  Ger- 
man law  it  is  a  German  company  like  any  other,  and  is  not  sub- 
ject to  the  requirements  concerning  security  for  costs;  in  matters 
of  taxation,  also,  it  has  independent  standing  and  it  is  liable  only 
to  such  taxes  as  are  warranted  upon  the  basis  of  its  earnings 
shown  by  the  annual  balance  sheet. 

The  German  laws  make  no  distinction  between  foreigners 
and  German  subjects  in  their  capacity  of  being  party  to  a  law- 
suit, for  every  one  who  has  rights  at  law  can  be  a  party  to  a  law- 
suit. The  German  laws  consider  every  living  person  capable  of 
being  a  party  to  a  suit,  and,  in  addition,  certain  institutions  or 
entities  endowed  with  the  rights  of  artificial  persons.  Among 
these  are  the  State,  Provinces,  communities,  many  public  insti- 
tutions such  as  savings  banks,  universities,  and  certain  ecclesi- 
astical orders;  practically  all  commercial  companies,  including 
stock  companies,  limited-liability  companies,  co-operative  insti- 
tutions, insurance  associations;  and,  finally,  associations  or  soci- 
eties which,  through  entry  in  the  German  Associations  Register, 
acquire  legal  rights. 

A  society  or  corporation  not  so  registered  can  not  sue  or  be 
sued  as  such.     A  co-partnership,  that  is,  a  combination  of  two 


478  INTERNATIONAL  COMMERCE 

or  more  business  men  for  the  carrying  on  of  a  commercial  en- 
terprise under  a  firm  name,  can  sue  and  be  sued;  an  individual 
business  man  who  has  adopted  a  firm  name  can  sue  and  be  sued 
under  the  name  of  his  firm. 

GREAT  BRITAIN  and  DEPENDENCIES. 

There  are  no  special  laws  in  England  applicable  to  the  es- 
tablishment of  business  agencies  or  branch  establishments  in  the 
case  of  firms  or  individuals  wishing  to  do  business  in  England. 
But  a  statement  of  the  names  and  addresses  of  the  partners  in 
a  partnership  may  be  compelled  by  any  litigant,  and  service  on 
one  member  of  the  firm  or  upon  any  person  having  control  or 
management  of  the  partnership  in  England  is  sufficient  to  give 
the  court  jurisdiction  over  any  property  of  the  partnership  in 
England. 

American  corporations  having  a  place  of  business  in  the 
United  Kingdom  are  required,  within  one  month  of  the  estab- 
lishment of  such  place  of  business,  to  file  with  the  Registrar  of 
Companies  a  certified  copy  of  their  charter  or  articles  of  incor- 
poration and  by-laws,  a  list  of  the  directors  of  the  company,  and 
the  names  and  addresses  of  one  or  more  persons  resident  in 
England  to  accept  on  behalf  of  the  company  service  of  process 
and  of  any  notices  required  to  be  served  on  the  company.  Notice 
of  alteration  of  any  of  the  above  matters  must  also  be  filed. 
Service  of  any  process  or  notice  by  mail  to  such  person  and  ad- 
dresses is  sufficient. 

Each  year  the  company  must  file  with  the  registrar  such  a 
statement  of  its  affairs  as  an  English  company  must  file,  includ- 
ing (in  the  form  of  a  balance  sheet  duly  audited  by  the  com- 
pany's auditor)  a  summary  of  its  capital,  its  liabilities,  and  its 
assets,  giving  such  particulars  as  will  disclose  the  general  nature 
of  the  said  liabilities  and  assets  and  how  the  values  of  the  fixed 
assets  have  been  arrived  at,  but  need  not  include  any  statement 
of  profit  or  loss. 

Failure  to  comply  with  these  regulations  involves  liability 
of  every  officer  or  agent  of  the  company  to  a  fine  not  exceeding 
£50,  or  in  case  of  a  continuing  offense   £5  for  every  day  of 


FOREIGN  COMPANY    -  A.WS  17D 

default.    Only  a  fee  of  5s.  is  required  to  be  paid  on  registration. 

Foreign  companies  and  firms  are  taxed  in  the  same  manner 
as  English  companies  for  income  tax  upon  the  amount  of  annual 
profits  or  gains  received  from  any  property  within,  or  any  pro- 
fession, trade,  employment,  or  vocation  exercised  within  the 
United  Kingdom.  There  is  no  other  tax  on  business  done.  They 
pay  rates  and  taxes  in  the  same  manner  as  individuals  to  the 
municipality  in  which  they  are  domiciled. 

In  Australia  and  New  Zealand  foreign  companies  and  firms 
establishing  branches  are  required  to  register.  In  South  Africa 
it  is  preferable  to  form  a  special  company  under  local  laws,  in 
order  to  avoid  taxation  on  the  capital  and  the  profits  of  the  par- 
ent company.     There  are  no  registration  requirements  in  India. 

GREECE. 

Foreign  companies  can  trade  in  Greece  as  Greek  firms.  They 
should  be  registered.  Companies  with  headquarters  in  countries 
which  do  not  grant  free  rights  of  trading  to  Greeks  have  no 
standing  in  the  Greek  courts  as  litigants. 

HAITI. 

In  order  to  establish  a  branch  in  Haiti,  an  American  firm 
must  comply  with  the  following  formalities :  a)  obtain  a  license 
from  the  President  of  the  Haitian  Republic,  b)  a  certificate  from 
the  Conseil  Communal  in  accordance  with  the  tariff  in  force. 

The  petition  for  a  license  must  be  directed  to  the  secretary 
of  state  for  Finance  and  Commerce  (Secretaire  d'Etat  des  Fi- 
nances et  du  Commerce).  On  receipt  of  the  license,  application 
must  be  made  direct  to  the  Conseil  Communal  for  a  certificate. 
The  license  is  indispensable  for  the  carrying  on  of  any  business 
or  profession,  and  is  very  rarely  refused.  Both  the  license  and 
the  certificate  (patente)  are  renewable  from  year  to  year. 

The  Haitian  law  recognizes  commercial  partnerships,  stock 
companies  (societe  anonyme),  partnerships  with  silent  partners 
(societe  en  commandite)  and  other  forms  of  commercial  associa- 
tion similar  to  those  in  use  in  France.  A  stock  company  cannot 
be  organized  without  the  express  permission  of  the  President 


480  INTERNATIONAL  COMMERCE 

of  the  Haitian  Republic.  Partnership  and  incorporation  acts 
must  be  submitted  to  the  Tribunal  of  Commerce  for  registration 
and  must  be  published  by  being  posted  for  three  months.  If  the 
partnership  or  company  has  several  branches  the  same  formali- 
ties must  be  carried  out  in  each  place.  The  data  which  must 
be  published  at  the  same  time  include  the  name  and  residence  of 
the  stockholders  and  partners,  active  and  silent,  value  of  shares 
and  of  individual  investments  (in  the  case  of  partnerships),  the 
names  of  local  managers  and  their  signatures,  and  the  decree  of 
the  President  of  Haiti  authorizing  the  incorporation  must  be  at- 
tached to  the  incorporation  act. 

GUATEMALA. 

All  foreign  companies  operating  branches  in  Guatemala  must 
register  and  file  copies  of  their  certificate  of  incorporation  with 
full  details. 

HOLLAND  (see  Netherlands.) 

HUNGARY. 

All  branches  of  foreign  firms  must  register  before  the  Tri- 
bunal of  Commerce.  Similarly  all  powers  of  attorney  must  be 
registered  before  the  Tribunal  of  Commerce. 

ITALY. 

All  firms  and  companies  whose  headquarters  are  out  of 
Italy  are  considered  non-Italian.  If  their  registered  offices  are 
located  out  of  Italy,  they  escape  the  numerous  irksome  regula- 
tions of  the  Italian  laws  relating  to  companies,  to  which  they  are 
otherwise  subject.  Foreign  companies  must  register  and  pub- 
lish the  memorandum  of  incorporation,  articles  of  incorporation, 
balance  sheets,  with  the  names  of  directors  abroad  and  of  man- 
agers in  Italy  and  with  fullest  details  regarding  capitalization, 
the  nature  of  business,  etc.  The  foreign  companies  are  subject 
to  a  tax  upon  that  portion  of  their  capital  which  is  used  to  carry 
on  business  in  Italy. 


FOREIGN  COMPANY  LAWS  481 

JAPAN. 

All  partnerships  carrying  on  business  in  Japan  must  re- 
gister. All  foreign  companies  opening  branches  in  Japan  must 
register  full  details  of  their  capitalization  and  incorporation  and 
appoint  a  resident  agent  with  a  power  of  attorney.  If  the  prin- 
cipal business  of  a  company  lies  in  Japan  it  is  considered  sub- 
ject to  regulations  of  Japanese  companies. 

The  Japanese  law  recognizes  the  following  forms  of  com- 
mercial associations : 

Gomei  Kaisha,  or  an  ordinary  partnership. 

Goshi  Kaisha,  or  a  partnership  with  unlimited  liability  for 
working  partners  and  a  limited  liability  for  sleeping  partners. 

Kabushiki  Goshi  Kaisha,  or  a  joint-stock  partnership. 

Kabushiki  Kaisha,  or  a  public  limited  liability  company. 

Foreign  companies  are  not  permitted  to  take  advantage  of 
being  foreign,  in  order  to  escape  the  provisions  passed  for 
Japanese  companies.  They  must  show  the  existence  of  their 
principal  offices.  They  must  also  show  the  character  of  their 
representation  in  Japan,  produce  the  articles  of  incorporation  or 
a  copy  of  the  partnership  contract  duly  legalized  by  a  Japanese 
consul  in  the  land  of  their  origin. 

The  Japanese  Commercial  Code  provides  as  follows: 

If  a  foreign  commercial  entity  establishes  a  branch  in  Japan, 
registry  and  publication  thereof  must  be  made  in  like  manner  as 
of  an  entity  of  the  same  or  similar  nature  created  in  Japan. 

A  foreign  commercial  entity  establishing  a  branch  must  also 
designate  a  representative  in  Japan,  and  register  his  name  and 
address  at  the  time  of  registering  the  establishment  of  the 
branch. 

JVGO$LAl?lA. 

This  important  new  commonwealth  will  doubtless  follow  the 
laws  of  Serbia  (which  see),  as  it  is  in  effect  a  Greater  and  a 
United  Serbia. 

MEXICO. 

Foreign  corporations  and  firms  must  file  copies  of  their  in- 
corporation or  partnership  contract,  certified  by  a  Mexican  con- 


182  INTERNATIONAL  COMMERCE 

sul,  with  balance  sheets  and  other  data  of  financial  character, 
and  all  powers  of  attorney  granted  to  representatives  in  Mexico 
must  be  registered,  having  been  previously  legalized  by  a  Mex- 
ican consular  officer. 

NETHERLANDS. 

Commercial  law  in  the  Netherlands  distinguishes  three  kinds 
of  commercial  companies  viz :  i )  "vennootschap  onder  een 
firma"  (corresponding  with  a  partnership  in  which  all  partners 
have  full  liability)  ;  2)  "commanditaire  vennootschap"  (corres- 
ponding with  a  partnership  with  ordinary  partners  and  sleeping 
partners)  ;  3)  "naamlooze  vennootschap"  (corresponding  with  a 
company  with  limited  liability  or  joint-stock  company).  All 
these  commercial  companies  can  only  be  established  by  a  written 
deed.  For  the  third  mentioned  an  authentic  notarial  deed  of 
association  in  required.  Besides  it  is  required  for  this  kind  of 
companies  that  the  deed  of  association  and  the  constitution  are 
approved  by  the  Queen.  Whilst  the  partners  of  the  companies 
mentioned  under  1  and  2  are  allowed  to  give  their  names  to  the 
company,  the  company  with  limited  liability  can  not  mention 
names  of  individuals  in  the  company's  name.  The  name  of  a 
company  with  limited  liability  has  therefore  to  be  derived  from 
the  nature  of  the  business  which  it  carries  on. 

If  the  deed  of  articles  of  association,  which  have  to  outline 
the  purpose  of  the  company  and  the  means  by  which  it  intends 
to  attain  same,  are  not  in  conflict  with  the  good  moral,  public 
order  or  the  regulations  of  paragraphs  38  to  55  of  the  Nether- 
land  Commercial  Code  the  Royal  consent  for  the  establishment 
of  a  limited  company  is  granted.  In  case  of  refusal,  the  reasons 
are  stated  to  the  applicants.  For  every  change  in  the  memo- 
randum or  articles  of  association  the  Royal  consent  has  to  be 
applied  for.  The  consent  will  not  be  granted  if  the  persons  who 
wish  to  establish  the  company  do  not  represent  together  at  least 
one  fifth  of  the  capital  of  the  company. 

NORWAY. 

Foreign  firms  or  corporations  can  not  acquire  land  or  real 
estate  in  Norway,  or  building  and  mining  rights,  or  leases  of  10 


FOREIGN  COMPANY  LAWS  483 

years'  duration  or  over,  not  even  through  a  trustee.  They  must 
register  the  fullest  particulars  of  their  partnership  contract  or 
incorporation  and  give  full  details  of  the  management  of  their 
Norwegian  branches. 

PERU. 

All  foreign  companies  must  register  full  details  of  the  con- 
stitution of  the  firm  and  of  the  corporation  and  procure  an 
authorization  for  the  carrying  on  of  business. 

PORTUGAL. 

If  trading  from  a  Portuguese  address,  all  foreign  firms  and 
corporations  should  register.  If  opening  branches  or  agencies, 
full  details  of  the  foreign  corporation  must  be  declared.  A  for- 
eign corporation  may  be  declared  bankrupt  for  debts  contracted 
in  Portugal.  When  undertaking  trading,  manufacture  or  agri- 
cultural enterprises  in  Portuguese  colonies,  foreign  firms  must 
register  in  Portugal. 

ROU  MANIA. 

The  nationality  of  a  foreign  firm  or  corporation  is  deemed 
to  be  that  country  where  the  headquarters  or  the  registered  of- 
fice of  the  enterprise  are  located.  Roumanian  laws  are  very  severe 
in  relation  to  branches  and  agencies  of  foreign  concerns.  A  for- 
eign firm  or  company  must  petition  the  Minister  of  Commerce 
before  it  can  commence  trading  in  Roumania.  Four  copies  of 
the  deeds  to  any  properties  which  are  to  be  held  in  Roumania 
must  be  fully  attested  and  presented  to  the  Prefect,  Mayor, 
Chamber  of  Commerce  in  each  district  where  a  branch  is  to  be 
opened. 

Foreign  companies  must  furnish  complete  evidence  of  in- 
corporation and  clearly  specify  the  persons  who  are  to  sign  for 
the  company  in  Roumania.  They  must  make  a  deposit  of  20,000 
lei  with  the  State  Bank  of  Roumania,  unless  engaged  in  building 
factories,  working  mines  or  banking  operations.  They  must  then 
register  at  the  local  chamber  of  commerce  and  take  great  care 
not  to  exceed  the  powers  of  their  charter.  They  cannot  own  land. 


484  INTERNATIONAL  COMMERCE 

RUSSIA. 

Legislation  is  in  a  chaotic  state. 

SERBIA. 

In  order  to  open  a  branch  in  Serbia,  a  foreign  concern  must 
petition  the  Minister  of  Commerce.  New  company  laws  will  be 
probably  shortly  introduced. 

SPAIN. 

Foreign  companies  operating  in  Spain  are  governed  by  the 
laws  of  their  own  country,  but  branches  established  in  Spain 
must  conform  to  the  laws  of  Spain.  Foreign  corporations  can 
not  undertake  the  operating  of  tramways  and  railways  in  Spain. 

The  managers  of  such  corporations  must  be  Spaniards. 
There  are  no  restrictions  of  trading  by  foreigners. 

SWEDEN. 

An  authorization  is  necessary  to  open  a  branch  of  a  foreign 
firm  in  Sweden.  A  deposit  with  a  bank  in  Sweden  equal  to  three 
years'  taxes  is  required.  For  operating  mines  and  working  up 
raw  materials  a  special  authorization  is  required.  It  is  neces- 
sary to  appoint  a  native  resident  agent  or  a  foreigner  who  had 
already  been  authorized  to  trade  in  Sweden  The  foreign  firm 
or  company  must  sign  an  agreement  to  submit  to  Swedish  juris- 
diction in  all  matters  appertaining  to   Swedish  business. 

The  Swedish  law  recognizes  the  following  forms  of  com- 
mercial partnership  and  companies : 

Handelsbolag — a  private  partnership  with  unlimited  liability 
of  partners. 

Kommandit-bolag — a  partnership  with  unlimited  liability  of 
working  partners,  while  the  liability  of  the  "Kommandit"  part- 
ner is  limited  to  his  investment. 

Aktiebolag — stock  company ;  must  have  at  least  5  incorpora- 
tors who  must  be  Swedish  subjects  resident  in  Sweden. 

Minimum  stock  capital  is  5000  Swedish  crowns.  Every 
share  must  be  fully  paid  in  2  years.     One  half  of  the  capital 


SWISS  COMPANY  LAWS  485 

must  be  paid  in  at  the  time  of  the  incorporation.  The  applica- 
tion must  state  the  object  of  the  company,  give  the  value  of  the 
share,  mention  the  seat  of  the  board  of  directors,  and  the  direc- 
tors must  be  Swedes  residing  in  Sweden. 

SWITZERLAND. 

In  each  Canton  of  Switzerland  there  is  a  commercial  re- 
gister for  the  registrations  prescribed  by  the  Code  of  Obligations 
or  by  other  Federal  laws. 

The  authorities  charged  with  the  tenure  and  supervision  of 
the  commercial  register  are  designated  by  the  cantonal  laws. 
Each  Canton  is  free  to  institute  special  registers  by  districts  and 
to  confer  the  tenure  and  supervision  thereof  upon  special  of- 
ficers. 

The  Federal  Council  prescribes  by  regulations  the  organiza- 
tion, tenure,  and  control  of  the  commercial  registers,  the  pro- 
cedure to  be  followed  in  the  matter  of  registration,  the  fees  to 
be  paid,  the  procedure  for  appeal,  and  the  organization  of  the 
Official  Journal  of  Commerce. 

Every  person  capable  of  contracting  has  the  right  to  have 
himself  registered  in  the  commercial  register  of  the  place  where 
he  lives. 

Every  person  who  carries  on  business  under  a  special  trade 
name  or  style  has  the  right  to  register  such  name  on  the  com- 
mercial register  of  the  place  where  he  has  his  principal  estab- 
lishment, and  wherever  he  has  branches,  provided  he  is  re- 
gistered at  the  principal  place. 

Every  person  who  carries  on  business,  operates  a  factory, 
or  exercises  in  a  commercial  way  any  industry  whatever,  is 
bound  to  register  himself  on  the  register  of  the  place  of  his 
principal  establishment  and  wherever  he  has  a  branch. 

In  all  registrations  the  Christian  names  in  full,  residence, 
place  of  birth,  and  in  the  case  of  foreigners,  nationality,  must 
be  added  whenever  any  surname  is  inscribed;  and  the  occupa- 
tion of  the  members  of  boards  of  directors  or  similar  bodies 
must  also  be  stated. 

Whoever  is  alone  at  the  head  of  a  house,  without  having  a 


486  INTERNATIONAL  COMMERCE 

general  or  special  partner,  can  not  adopt  as  his  trade  name  or 
style  any  but  his  family  name,  with  or  without  a  Christian  name. 
He  must  add  nothing  thereto  which  indicates  a  partnership  or 
corporation,  but  it  is  permissible  to  add  other  indications  of  a 
nature  to  designate  more  precisely  his  person  or  the  nature  of 
his  business. 

When  a  trade  name  or  style  is  registered  on  the  commercial 
register  it  can  not  be  used  in  the  same  locality  by  anyone  else, 
even  if  he  personally  bears  the  same  name.  In  such  a  case  the 
second  person  must  add  something  to  his  name  which  clearly 
distinguishes  him  from  the  style  already  registered. 

The  name  or  style  of  a  general  partnership  must  include  the 
names  of  all  the  partners,  or  at  least  the  name  of  one  with  an 
addition  indicating  the  existence  of  a  partnership. 

The  name  or  style  of  a  general  or  special  partnership  must 
contain  no  name  other  than  that  of  the  general  partners,  nor  can 
it  characterize  itself  as  a  stock  corporation,  even  though  the 
partnership  capital  be,  in  whole  or  in  part,  divided  into  shares. 
When  a  partner  in  a  special  or  general  partnership  ceases  to  be 
a  member  of  the  firm  his  name  can  not  be  continued  in  the  firm 
name,  even  with  his  consent  or  that  of  his  heirs. 

The  foregoing  provision  as  to  firm  name  apply  to  the  suc- 
cessor of  an  existing  establishment.  He  may,  however,  indicate 
in  his  style  to  whom  he  succeeds,  if  he  is  expressly  or  impliedly 
authorized  by  his  predecessor  or  the  heirs  of  his  predecessor. 

The  object  of  the  foreoing  provisions  of  the  Code  of  Obliga- 
tions is  to  enable  anyone  to  tell  at  a  glance  and  without  hesita- 
tion whether  he  is  dealing  with  an  individual,  a  partnership,  or 
a  company. 

Registration  of  Foreign  Branch  Houses. 

On  or  before  the  ist  of  July  of  each  year  there  must  be  filed 
in  the  registry  office  a  list  of  all  the  members  of  the  managing 
board  of  stock  companies,  boards  of  supervision  of  limited  part- 
nership associations,  and  boards  of  directors  and  boards  of 
supervision  or  limited  partnership  associations,  and  boards  of 
directors  and  boards  of  supervision  of  foreign  juristic  persons 
having  a  branch  in  Switzerland,  the  list  to  be  signed  by  the  pre- 


SWISS  COMPANY  LAWS  487 

sident.  Such  list  must  contain  the  surname  and  first  name,  place 
of  birth,  and,  in  the  case  of  foreigners,  nationality,  occupation, 
and  residence  of  each  member  of  the  board.  These  lists  are 
public  records,  which  can  be  consulted  without  charge  and  cer- 
tified copies  obtained  for  a  nominal  fee. 

Establishing  a  Branch  Office  in  Switzerland. 

American  business  firms  may  establish  branch  offices  in 
Switzerland  without  any  special  formalities.  They  must  merely 
apply  for  registration  in  the  commercial  register,  which  is 
granted  without  trouble,  and  under  the  same  requirements  as  for 
Swiss  firms,  registering  and  publishing  all  details  concerning  or- 
ganization, capital,  and  management  which  may  be  of  import- 
ance to  creditors  and  other  third  parties.  A  foreign  company 
which  has  been  legally  incorporated  in  its  own  country  is  gov- 
erned by  its  certificate  of  incorporation  and  by-laws  (memo- 
randum and  articles  of  association),  these  being  recognized  by 
Swiss  law,  provided  certified  copies  are  filed  in  the  register.  The 
names  and  signatures  of  persons  authorized  to  act  or  sign  in 
Switzerland  on  behalf  of  a  foreign  firm  or  company  must  be 
filed. 

Branches  of  American  concerns  are  taxed  in  the  same  man- 
ner as  Swiss  firms.  Tax  regulations  differ  from  Canton  to 
Canton,  but  only  such  capital  as  actually  is  invested  in  Switzer- 
land forms  the  basis  of  taxation.  The  home  capital  and  assets 
of  a  foreign  firm  with  a  Swiss  branch  are  not  subject  to  tax- 
ation. 

Powers  of  Attorney. 

Powers  of  attorney  are  required  under  the  Federal  and 
cantonal  laws  of  Switzerland  and  are  demanded  by  Swiss  law- 
yers representing  foreign  litigants.  No  particular  form  is  pre- 
scribed by  law,  but  the  power  of  attorney  should  specify  clearly 
the  intention  of  the  donor,  the  subject  matter  involved,  the  names 
of  the  parties,  including  that  of  the  donee  of  the  powers,  and 
the  time  and  place  of  its  execution.  If  executed  on  behalf  of 
a  corporation  or  other  juristic  person,  it  should  show  the  author- 


488  INTERNATIONAL  COMMEECE 

ity  of  the  person  signing  it,  and  his  signature  should  be  properly 
legalized. 

It  is  advisable,  therefore,  where  a  power  of  attorney  is  ex- 
ecuted on  behalf  of  a  partnership  or  body  corporate,  to  have  the 
notary  public  or  a  Swiss  consul,  who  legalizes  the  signature  of 
the  person  or  persons  executing  it,  certify  that  he  has  seen  the 
articles  of  partnership  or  the  by-laws  of  the  corporation,  as  the 
case  may  be,  and  that  the  person  or  persons  signing  are  duly 
authorized  to  execute  the  power  in  the  firm  or  corporate  name 
and  that  such  execution  is  binding  thereon.  This  may  also  be 
accomplished  by  including  a  recital  of  these  facts  as  to  the 
authority  of  the  person  or  persons  signing  it  in  the  power  or 
letter  of  attorney. 

If  the  case  may  require  it,  the  power  of  attorney  should  be 
executed  in  duplicate  or  triplicate  and  should  be  acknowledged 
before  a  Swiss  consul  or  before  a  notary  public,  and  the  latter's 
signature,  or  else  the  signature  of  the  county  clerk  certifying  to 
the  genuineness  of  the  notary's  signature,  should  be  legalized  by 
a  Swiss  consul. 

The  Code  of  Obligations  recognizes  six  kinds  of  business 
association : 

i.  The  simple  partnership  (Einfache  Gesellschaft ;  societe 
simple). 

2.  The  general  partnership  (Kollektiv-gesellschaft;  societe 
en  nom  collectif). 

3.  The  limited  partnership  (Kommandit-gesellschaft;  societe 
en  commandite). 

4.  The  stock  corporation  (Aktien-gesellschaft;  societe  ano- 
nyme  ou  par  actions). 

5.  Limited  partnership  association  (Kommandit-aktien-ge- 
sellschaft;  societe  en  commandite  par  actions). 

6.  The  co-operative  society  (Genossenschaft;  societe  co- 
operative) . 

URUGUAY. 

All  branches  of  foreign  firms  or  companies  must  register, 
and  all  powers  of  attorney  must  likewise  be  registered.  There 
are  otherwise  no  restrictions. 


!  COMMERCIAL  TRAVELERS  489 

VENEZUELA. 

All  foreign  firms  operating  in  Venezuela  must  register. 
Life  insurance  companies  intending  to  operate  in  Venezuela  must 
invest  $120,000  gold  in  landed  property  in  Venezuela. 

3.    Licenses  for  Commercial  Travelers. 

In  a  number  of  foreign  countries,  particularly  in  Latin- 
America,  commercial  travelers  soliciting  business  for  foreign 
concerns  are  subject  to  more  or  less  heavy  taxation,  national  as 
well  as  municipal.  In  several  countries  the  practice  persists  of 
collecting  duty  on  samples  carried  by  commercial  travelers  even 
if  they  have  been  rendered  valueless. 

As  these  license  fees  change  from  time  to  time,  it  is  inex- 
pedient to  attempt  to  publish  them  here,  but  the  Bureau  of  Foreign 
and  Domestic  Commerce  keeps  a  current  file  of  these  regula- 
tions. Where  a  foreign  house  maintains  a  local  agency  or  branch 
it  is  well  to  attach  the  visiting  traveling  salesman  to  such  a 
branch  for  the  time  of  his  activity.  This  is  in  no  sense  an  at- 
tempt to  evade  the  laws  or  regulations  of  foreign  countries,  but 
the  local  agency  or  branch  pays  its  own  taxes  for  the  conduct 
of  its  principal's  business,  and  the  visiting  traveling  salesman's 
activity  being  generally  intended  to  supplement  the  branch's  ef- 
forts, the  principals  may  fairly  take  advantage  of  the  situation. 

Efforts  are  being  put  forth  in  the  United  States  to  induce 
Latin  American  countries  to  accept  treaties  providing  for  a 
single  license  fee  to  be  paid  by  commercial  travelers  in  each 
country,  in  place  of  numerous  local  fees  and  for  the  refund  of 
duties  on  samples,  if  re-exported  within  6  months.  The  sig- 
natures of  Uruguay  and  Panama  have  been  secured  and  other 
countries  are  coming  into  line.  While  the  practices  in  relation 
to  the  collection  of  license  fees  from  foreign  traveling  salesmen 
are  most  irksome  in  Latin-American  countries,  amounting  in 
Argentina,  for  instance,  to  a  hardship,  even  some  of  the  European 
countries  either  impose  or  contemplate  imposing  (as  in  France) 
taxes  and  registration  regulations  upon  the  activities  of  foreign 
commercial  salesmen. 


490  INTERNATIONAL  COMMERCE 

4.     Adjustment  of  Disputes  and  Recovery  of  Debts. 

In  the  following  lines  it  is  the  aim  of  the  author  to  suggest 
to  the  credit  man  a  few  methods  or  procedure  in  connection  with 
disputes  and  overdue  accounts  in  foreign  countries. 

While  in  charge  of  the  credit  department  of  a  national  or- 
ganization serving  the  interests  of  a  large  number  of  American 
manufacturers  and  exporters,  the  author  had  occasion  a  number 
of  years  ago  to  deal  with  an  extraordinary  number  of  claims  of 
American  manufacturers  against  foreign  concerns,  and  he  found 
it  necessary  to  organize  a  debt  recovery  service  to  deal  with 
them. 

He  had  at  his  disposal  the  following  machinery :  banking 
correspondents  and  special  representatives  who  furnished  his 
organization  with  credit  information.  This  network  of  corres- 
pondents covered  all  the  commercial  centers  of  the  world.  His 
legal  advisers  were  in  most  cases  the  attorneys  of  the  banking 
correspondents  in  various  foreign  cities. 

The  claims — to  the  number  of  several  thousand — which 
passed  through  his  hands  could  be  roughly  divided  into  the  fol- 
lowing classes: 

1.  Disputes  which  could  be  settled  only  through  arbitration 
or  litigation,  the  defendants  being  respectable  houses,  and  the 
disputes  involving  a  radical  but  honorable  difference  of  opinion. 

2.  Disputes  due  to  the  manufacturer  or  exporter  being  at 
fault. 

3.  Disputes  due  to  a  misunderstanding  on  the  part  of 
either  party. 

4.  Disputes  due  to  artbitrary  acts  on  the  part  of  a  foreign 
state. 

5.  Open  accounts  overdue  to  temporary  embarrassment  of 
the  debtor. 

6.  Drafts  not  met  for  various  causes. 

7.  Bad  debts  due  to  dishonesty  of  the  debtor. 

8.  Accounts  against  insolvent  debtors. 


ADJUSTMENT  OF  DISPUTES  491 

It  must  be  mentioned  for  the  benefit  of  the  credit  man  that 
the  best  way  of  dealing  with  foreign  debts  is  to  keep  out  of  liti- 
gation. In  the  most  advanced  foreign  countries  there  is  no 
danger  of  discrimination  in  commercial  courts  against  the  in- 
terests of  a  foreign  litigant.  In  many  backward  countries  such 
a  danger  emphatically  exists.  Litigation  is  not  desirable  even  at 
home,  but  where  the  suit  must  be  brought  at  long  range  there  is 
every  reason  to  seek  settlement  out  of  courts.  Litigation  abroad 
is  more  or  less  expensive.  American  litigants  in  foreign  courts 
are  frequently  called  upon  to  put  up  heavy  bonds,  particularly 
in  appeal  cases.  Foreign  lawyers  are  debarred  in  many  coun- 
tries from  accepting  business  on  a  contingent  basis. 

In  the  case  of  disputes  which  involve  divergence  of  opinion, 
it  must  be  assumed  that  the  indebted  party  is  an  honorable  house. 
If  the  creditor  has  an  agent  or  representative  at  the  domicile  of 
the  debtor,  the  case  is  simplified  in  that  the  representative  can 
use  his  judgment  in  coming  to  an  arrangement  with  the  debtor 
or  use  such  legal  machinery  in  behalf  of  his  principal  as  is  avail- 
able. 

If  the  creditor  has  no  such  agent  or  representative,  he  may 
turn  to  his  bank  and  put  all  the  facts  before  it  and  ask  that  the 
attorney  for  the  bank's  correspondent  be  entrusted  with  the  ne- 
gotiations, handling  the  matter  in  such  a  way  as  to  arouse  no 
ill-will  in  the  debtor,  but  taking  it  up  with  the  debtor  as  an  un- 
fortunate misunderstanding  in  which  both  sides  have  to  come 
to  some  agreement. 

In  the  case  of  disputes  where  the  manufacturer  is  at  fault 
and  does  not  know  it,  he  must  try  to  study  the  case  objectively 
and  acknowledge  his  error  and  make  such  concessions  as  will 
straighten  out  the  tangle. 

In  case  of  misunderstanding  a  bank  and  its  correspondent 
at  the  domicile  of  the  debtor  may  straighten  out  the  trouble. 

Occasionally  a  foreign  state  government  will  arbitrarily  re- 
lease goods  to  a  debtor  who  may  take  advantage  of  this  and 
refuse  to  pay  drafts.  Here  the  intervention  of  the  State  De- 
partment may  be  invoked  as  against  the  state  government  in 
question,  a  somewhat  undesirable,  lengthy,  but  generally  effective 
proceeding.  Far  better  it  is  to  place  the  matter  in  the  hands  of 
an  organization  such  as  the  National  Asociation  of  Manufactu- 


492  INTERNATIONAL  COMMERCE 

rers,  the  American  Manufacturers'  Export  Association,  or  an 
American  chamber  of  commerce,  if  one  exists  at  the  domicile  of 
the  debtor.  It  is  the  author's  belief  that  particularly  the  Na- 
tional Association  of  Credit  Men,  or  a  central  credit  clearing 
house,  if  one  is  ever  established  in  the  United  States,  could  also 
diplomatically  deal  with  such  cases.  If  such  unfair  debtors  re- 
alize that  their  tactics  may  injure  their  standing  with  the  cred- 
itors in  America,  they  will  quickly  come  to  terms. 

In  the  case  of  open  accounts  overdue  because  of  a  tempo- 
rary embarrassment  of  the  debtor,  it  is  advisable  to  draw  on  him, 
instructing  the  bank  to  protest  the  draft  unless  accepted  for  a 
reasonable  time  after  sight.  The  bank's  attorney  may  be  in- 
structed to  proceed  with  such  steps  as  are  open  in  various  coun- 
tries for  dealing  with  protested  drafts. 

Similar  instructions  may  be  issued  in  connection  with  drafts 
not  met  for  various  other  reasons. 

In  the  case  of  dishonest  debtors  the  matter  should  be  placed 
in  the  hands  of  an  attorney  with  instructions  to  do  his  best  to 
recover  the  amount  due. 

In  the  case  of  insolvency  proofs  of  indebtedness  should  be 
furnished  exactly  as  in  the  case  of  insolvencies  in  the  United 
States  and  legalized  at  the  proper  consulate  before  being  sent 
on  to  an  attorney  abroad. 

How  to  get  a  reliable  attorney  abroad?  Almost  every  con- 
sulate in  New  York  has  a  legal  adviser  of  its  nationality  located 
in  New  York,  who  may  be  consulted  with  regard  to  foreign 
laws. 

American  consuls  cannot  undertake  the  collection  of  over- 
due accounts,  but  will  gladly  furnish  the  names  of  reliable  at- 
torneys in  the  city  where  they  are  collected. 

There  are  American  chambers  of  commerce  in  several  for- 
eign countries  who  will  on  application  furnish  the  names  of  at- 
torneys in  their  vicinity. 

Finally  any  American  bank  with  foreign  correspondents  will 
write  their  correspondent  for  the  name  of  a  reliable  attorney. 

In  many  cases  a  conciliatory  letter  by  the  credit  man  will 
bring  the  desired  results. 

Any  American  organization  of  national  importance  can  es- 
tablish a  Foreign  Debt  Recovery  Bureau  in  charge  of  an  ex- 


ARBITRATION  OF  DISPUTES  493 

perienced  and  tactful  manager,  utilizing  the  machinery  of  bank- 
ing in  order  to  place  himself  in  touch  with  a  network  of  at- 
torneys abroad  who  will  in  case  of  necessity  act  for  the  Bureau 
in  collecting  overdue  accounts.  But  the  personal  intervention  of 
such  a  Bureau — if  tactfully  and  diplomatically  managed — will 
collect  at  least  50%  of  accounts,  where  the  debtor  is  a  firm  of 
some  responsibility. 

Mention  may  be  made  here  of  important  steps  undertaken 
by  the  Chamber  of  Commerce  of  U.  S.  A.  and  by  the  Tanners' 
Council  to  instal  adequate  machinery  for  the  settlement  of  dis- 
putes by  arbitration. 

It  is  to  be  hoped  that  these  steps  are  but  a  beginning  of  a 
widely  ramified  and  standardized  method  of  the  setttlement  of 
commercial  disputes  between  American  and  foreign  business 
firms.  There  may  be  two  varieties  of  such  disputes :  the  first  re- 
quiring expert  opinions  and  adjudication  by  specialists  in  certain 
trades,  and  the  second  involving  general  commercial  usage,  either 
international  or  local.  In  the  first  instance  the  intervention  of 
an  organization  such  as  the  Tanners'  Council  in  the  leather  and 
allied  trades  will  be  of  great  value.  In  the  second  instance,  a 
well-established  chamber  of  commerce  will  be  doubtless  the 
proper  body  to  initiate  arbitration  proceedings  at  the  request  of 
the  parties  in  dispute.  In  either  case  the  parties  must  volunta- 
rily submit  to  arbitration,  and  the  points  at  issue  will  usually 
represent  an  honest  difference  of  opinion,  rather  than  an  unwar- 
ranted or  improper  attitude  on  the  part  of  either  litigant.  The 
more  or  less  official  standing  and  prestige  of  many  foreign  cham- 
bers of  commerce  is  likely  to  assure  substantial  justice  abroad, 
while  the  American  chamber  of  commerce  or  industrial  organ- 
ization— though  lacking  in  official  standing — may  be  always  re- 
lied on  to  bring  to  the  solution  of  disputes  of  American  firms 
with  foreign  concerns  that  fairminded  and  business-like  attitude 
which  is  part  and  parcel  of  American  commercial  life. 

Pending  the  development  of  such  a  comprehensive  system 
for  the  settlement  of  disputes,  the  credit  man,  or  the  counsel  of 
the  corporation,  will  find  it  advisable  not  to  await  a  sudden  legal 
difficulty,  but  will  try  to  secure,  with  the  help  of  consuls,  or  of 
American  chambers  of  commerce  abroad,  or  of  his  domestic 
bank,  if  it  has  foreign  relations,  a  list  of  reliable  attorneys — one 


494  INTERNATIONAL  COMMERCE 

at  least  for  each  country  where  the  concern  in  question  does  an 
extensive  business,  and  will  make  arrangements  with  such  an  at- 
torney for  attention  to  any  claims,  law  suits  or  other  matters, 
such  as  the  proper  filing  of  claims  against  insolvent  debtors,  or 
a  thousand  and  one  matters  requiring  the  services  of  competent 
counsel  which  may  develop  from  time  to  time.  It  is  far  better 
to  have  such  connections  before  any  trouble  arises,  than  to  seek 
them  in  an  emergency.  There  is  now  hardly  any  country  of 
commercial  importance  abroad  which  does  not  possess  some 
lawyer  of  standing  specially  fitted  to  attend  to  American  inter- 
ests, even  as  in  the  city  of  New  York  competent  lawyers  may 
be  found  who  are  well  versed  in  the  laws  of  various  foreign 
countries,  and  have  reliable  correspondents  in  their  home  coun- 
try. These  lawyers  may  be  located  through  application  to  the 
respective  consulates  in  New  York. 


CHAPTER  XIX. 

A.     Official  Trade  Promotion. 

1.    General  Remarks. 

In  Chapter  II  we  briefly  mentioned  official  trade  promotion 
among  the  basic  factors  affecting  the  development  of  interna- 
tional commerce  between  an  exporting  country  and  the  markets 
of  the  world.  We  now  can  take  up  for  consideration  in  greater 
detail  the  principles  which  should  govern  official  trade  promo- 
tion, if  it  be  intended  to  be  efficient,  and  in  particular  the  pres- 
ent methods  of  official  trade  promotion  in  the  United  States, 
with  a  view  to  the  extent  to  which  it  meets  the  needs  of  the 
American  business  community. 

The  importance  of  commerce  in  general,  and  of  interna- 
tional commerce  in  particular,  to  the  welfare  of  an  industrial 
nation  is  generally  recognized  by  the  assignment  under  various 
names  of  a  special  government  department,  under  the  guidance 
of  a  cabinet  minister,  to  the  safeguarding  of  the  interests  of 
commerce,  while  other  departments,  such  as  the  State  Depart- 
ment or  Ministries  of  Foreign  Affairs,  with  their  supervision  of 
the  consular  staff  and  co-operation  with  the  diplomatic  officers 
charged  with  the  care  of  commercial  interests,  such  as  commer- 
cial attaches,  and  Departments  or  Ministries  of  Agriculture  fre- 
quently assist. the  Department  of  Commerce  in  its  proper  work. 

Granting  the  recognition  of  the  importance  of  safeguarding 
and  promoting  the  interests  of  a  nation's  commerce  with  other 
nations — a  recognition  which  for  various  reasons  came  rather 
late  in  the  day  to  the  fore  in  the  United  States — there  are  certain 
principles  which  wisdom  and  practical  experience  recommend  as 
proper  to  pursue  in  official  trade  promotion,  others  which  wis- 
dom and  practical  experience  teach  us  to  be  unsuited  to  the 
needs  of  the  nation. 

It  is  utterly  against  the  spirit  of  American  business  develop- 


496  INTERNATIONAL  COMMERCE 

ment  either  to  desire  or  to  tolerate  paternalism  in  official  trade 
promotion.  The  American  manufacturer  and  the  American  ex- 
porter can  and  should  do  their  own  selling.  They  do  not  re- 
quire the  government  to  help  them  individually  to  market  their 
specific  products.  They  would  rather  resent  it.  They  do  not 
expect,  nor  would  they  be  likely  to  receive  from  the  government 
such  aid  in  meeting  foreign  competition  which  would  tax  other 
classes  of  population  in  giving  them  an  unfair  advantage  over 
their  foreign  competitors,  as  the  late  German  government  did  for 
its  commerce  in  helping  it  to  fasten  its  tentacles  throughout  the 
world. 

There  are  certain  things  which  official  trade  promotion  is 
reasonably  expected  to  do  for  the  nation's  commerce,  and  to  do 
well,  and  in  return  the  organs  charged  with  official  trade  pro- 
motion must  be  adequately  financed  by  the  government  to  enable 
them  to  perform  their  work  efficiently.  But  in  all  of  these  things 
the  benefit  of  the  business  community  at  large,  and  of  the  na- 
tion back  of  it  must  be  kept  in  view,  and  under  no  circumstances 
the  interests  of  an  individual  firm  or  set  of  firms  which  may 
have  gained  the  favor  of  these  organs  through  cultivating  their 
influence. 

Nor  must  official  organs  attempt  services  to  individual  firms 
on  an  individual  basis,  if  such  services  can  be  efficiently  per- 
formed by  existing  commercial  enterprises :  for  instance,  they 
should  not  include  in  their  activities  the  furnishing  of  credit 
reports  to  individual  inquirers  on  the  credit  standing  of  indivi- 
dual foreign  firms :  we  have  efficient  mercantile  agencies  for  that 
purpose,  and  the  machinery  of  the  government  must  not  be  used 
for  individual  needs,  without  being  instantly  and  publicly  avail- 
able for  the  entire  business  community.  Or  again  the  official 
trade  promotion  organs  must  not  undertake  the  furnishing  of 
translation  services,  or  the  securing  of  agencies  for  individual 
firms,  or  the  placing  of  individual  orders. 

On  the  other  hand  the  organs  charged  with  the  promotion 
of  the  commercial  interests  of  a  nation  should  gather  and  pres- 
ent in  an  accessible  manner,  efficiently,  adequately,  systematically 
and  above  all  promptly  information  of  statistical  character,  in- 
formation on  the  needs  in  various  markets  for  the  exporting  na- 
tion's products,  data  regarding  tariff  changes,  taxation  and  all 


OFFICIAL  TRADE  PROMOTION  41)7 

other  matters  which  the  manufacturer  and  exporter  cannot  prop- 
erly obtain  on  his  own  initiative,  excepting  in  rare  instances,  but 
all  this  information  must  be  available  on  equal  terms  to  all  those 
who  are  properly  entitled  to  it.  Finally  official  trade  promotion 
should  undertake  special  investigations  of  benefit  to  entire  in- 
dustries in  their  battle  for  foreign  markets,  it  should  maintain 
in  all  the  strategic  points  of  the  world's  commerce  competent 
correspondents,  it  should  be  keenly  alive  to  opportunities  for  the 
nation's  commerce  wherever  it  can  compete,  or  enlighten  it,  if 
possible,  on  ways  and  means  of  attaining  a  competitive  stand- 
ing; it  should  give  its  services  in  a  practical,  prompt  and  liberal 
manner,  free  from  any  taint  of  red  tape;  it  should  keep  in  close 
touch  with  the  organized  business  interests  of  the  nation  as  ex- 
pressed in  national  and  local  associations,  periodic  conventions 
and  gatherings,  it  should  be  absolutely  free  from  any  alliance 
with  politics ;  in  dealing  with  any  organization  it  should  never 
lose  sight  of  the  fact  that  its  facilities  are  intended  for  the  bene- 
fit of  the  whole  nation,  and  that,  as  stated  above,  the  machinery 
of  the  government  must  not  be  used  for  the  promotion  of  in- 
dividual interests  or  schemes,  excepting  inasfar  as  these  may 
benefit  by  official  efforts  freely  presented  to  all  truly  concerned. 

2.    The  Activities  of  the  U.  S.  Department  of  Commerce. 

The  Department  of  Commerce  is  the  executive  department 
charged  in  the  United  States  with  the  promotion  of  American 
trade  interests  in  the  world's  markets,  in  addition  to  many  other 
duties. 

It  maintains  for  that  purpose  a  special  section,  known  as  the 
Bureau  of  Foreign  and  Domestic  Commerce.  Considering  the 
short  time  this  Bureau  has  been  in  existence  it  may  be  freely 
admitted  to  have  reached  a  very  high  degree  of  efficiency.  While 
minor  criticisms  may  be  found  with  its  working — chiefly  due  to 
appropriations  that  are  very  inadequate — '  it  may  be  said  to  be 
to-day  the  foremost  and  most  efficient  existing  official  organiza- 
tion for  the  promotion  of  a  nation's  commercial  interests. 

It  is  housed  on  several  floors  of  the  Building  of  the  Depart- 
ment of  Commerce  in  Washington  under  the  headship  of  a  chief 
and  of  two  assistant  chiefs,  and  maintains  competently  managed 


498  INTERNATIONAL  COMMERCE 

sections  for  tariffs,  statistics,  trade  opportunities,  lists,  etc. ;  a 
Latin-American,  a  Far-Eastern,  a  European  and  a  Russian  sec- 
tion; an  editorial  staff  for  the  editing  of  its  daily,  periodic  and 
special  publications;  it  operates  district  offices  in  New  York, 
Boston,  Chicago,  St.  Louis,  New  Orleans,  San  Francisco,  and 
Seattle,  and  co-operative  offices  in  connection  with  the  chambers 
of  commerce  and  similar  organizations  in  Cleveland,  Cincinnati, 
Los  Angeles,  Philadelphia,  Portland  and  Dayton. 

In  the  foreign  field  it  is  ably  assisted  by  permanent  com- 
mercial attaches  and  traveling  trade  commissioners,  formerly 
known  as  commercial  agents.  The  commercial  attaches  are  ap- 
pointed by  the  Secretary  of  Commerce  after  an  examination  and 
are  accredited  through  the  State  Department.  Their  duty  is  to 
investigate  and  to  report  upon  such  conditions  in  the  manufac- 
tures, industries  and  the  trade  of  foreign  countries  as  may  be 
of  interest  to  United  States.  While  the  compensation  of  these 
officers  is  very  inadequate,  they  have  done  work  which  has  gra- 
dually increased  in  importance  and  bodes  well  for  the  future  use- 
fulness of  this  system.  Commercial  attaches  have  been  appointed 
for  Buenos  Ayres,  Copenhagen,  The  Hague,  Lima,  London, 
Melbourne,  Paris,  Peking,  Petrograd,  Rio  de  Janeiro,  Tokyo. 

Trade  commissioners,  formerly  known  as  commercial  or 
special  agents,  are  charged  with  investigations  in  foreign  mar- 
kets for  the  extension  of  American  manufactures.  The  results 
of  these  investigations  are  embodied  in  monographs,  many  of 
which  are  models  of  their  kind  and  have  excited  the  admiration 
of  the  business  world  at  home  and  abroad.  They  are  also  ap- 
pointed as  the  result  of  competitive  examinations.  On  the  whole 
the  personnel  of  these  commissioners  (appointed  for  a  special 
investigation  from  time  to  time)  is  fairly  high  grade,  although, 
naturally  enough  in  view  of  the  low  compensation  and  inade- 
quate provisions  for  their  maintenance  while  abroad  some  in- 
efficient and  incompetent  men  slip  in  occasionally. 

The  sections  of  statistics  and  of  foreign  tariffs  are  admir- 
ably equipped  and  up  to  the  highest  standard  of  efficiency. 

The  Bureau  edits  "Commerce  Reports,"  a  daily  journal  with 
contributions  from  consuls  on  a  variety  of  topics.  Occasionally 
special  articles  of  trade  commissioners  are  also  published.  "Com- 
merce Reports"  are  sold  on  the  basis  of  an  annual  subscription 


DEPARTMENT  OF  COMMERCE  499 

within  the  reach  of  any  firm  or  individual.  It  contains  also  a 
list  of  Foreign  Trade  Opportunities,  for  which  it  is  claimed  that 
they  result  in  the  opening  of  many  connections  with  foreign 
countries  and  in  the  placing  of  many  orders.  It  seems,  how- 
ever, that  there  should  be  no  room  in  an  official  publication  for 
such  matters.  The  large  portion  of  such  inquiries  are  likely  to 
prove  worthless.  There  are  regular  commercial  channels  through 
which  a  person  abroad  can  secure  quotations  from  American 
manufacturers  and  exporters.  After  all  it  enables  a  foreign  in- 
quirer to  receive  an  overwhelming  mass  of  offers,  only  one  of 
which  he  can  accept,  which  means  a  great  waste  of  effort  or 
energy.  Ordinarily  his  appeal  to  a  government  body  for  con- 
nections argues  that  the  inquirer  is  in  no  great  hurry  and  is  not 
familiar  with  the  regular  commercial  channels.  There  are,  of 
course,  exceptions  to  the  rule.  Far  more  important  would  be 
mentions  of  trade  opportunities  that  come  to  the  notice  of  con- 
suls or  trade  commissioners  and  that  would  ordinarily  escape  the 
knowledge  of  American  manufacturers  and  exporters,  if  such 
information  could  be  cabled  over  and  promptly  disseminated. 
This,  however,  is  a  very  minor  criticism  and  "Commerce  Re- 
ports" may  be  confidently  described  as  the  livest  journal  of  of- 
ficial trade  information  in  the  world.  It  is  provided  with  most 
valuable  semi-annual  indices. 

The  Bureau  of  Foreign  and  Domestic  Commerce  publishes 
from  time  to  time  special  bulletins  and  handbooks  on  important 
subjects  covering  a  wide  range  of  subjects.  These  also  are  of 
great  interest  and  are  much  valued  by  the  business  community. 

The  statistical  publications  issued  by  the  Bureau  of  Foreign 
and  Domestic  Commerce  are  the  Monthly  Summary  of  Foreign 
Commerce  of  the  United  States,  Commerce  and  Navigation  of 
the  United  States,  and  Statistical  Abstracts  of  the  United  States, 
the  last  two  published  annually.  These  statistical  publications 
are  also  high  grade  in  every  way. 

The  list  of  publications  of  the  Bureau  shows  180  pamphlets 
in  the  Special  Agents'  Series,  81  Special  Consular  Reports,  82 
reports  in  the  Miscellaneous  Series  and  39  reports  in  the  Tariff 
Series. 

The  Bureau  of  Foreign  and  Domestic  Commerce  must  be 
given  credit  for  progressive  spirit  and  readiness  to  do  whatever 


500  INTERNATIONAL  COMMERCE 

the  needs  of  the  moment  demonstrate  as  desirable ;  it  did  valiant 
work  in  thwarting  German  commercial  plots  abroad;  it  was  very 
successful  in  combating  the  trade-mark  piracy  practiced  in  cer- 
tain countries  against  American  products,  it  intervened  in  the 
platinum  shortage  in  191 7  and  1918,  and  relieved  the  situation 
through  the  services  of  its  attache  in  Petrograd;  its  work  along 
the  lines  of  promoting  foreign  trade  education  has  been  most 
helpful :  apart  from  the  fact  that  many  of  its  publications  have 
been  successfully  used  as  text-books  on  special  subjects  in  for- 
eign trade  instruction,  it  has  helped  to  shape  the  syllabus  and  the 
study-course  of  many  institutions  which  have  taken  up  this  im- 
portant subject.  In  the  great  emergency  of  the  World  War  it 
furnished  the  War  Trade  Board,  the  Military  Intelligence  De- 
partment and  the  Shipping  Board  a  wealth  of  statistical  and  other 
information,  and  its  attaches  abroad  assumed  at  a  moment's  not- 
ice the  task  of  acting  as  representatives  for  these  emergency 
bodies,  in  addition  to  their  many  proper  duties. 

Its  excellent  work  and  ever  improving  services  and  readi- 
ness to  keep  in  touch  with  the  business  world  by  attending  con- 
ventions of  representative  commercial  bodies,  lending  samples 
and  other  exhibits,  addressing  meetings  of  business  men,  etc. 
has  brought  about  a  marvelous  change  in  the  attitude  of  the  busi- 
ness world  to  the  activities  of  the  Bureau  and  there  exists  at  the 
present  time  a  fine  spirit  of  co-operation  and  mutual  confidence 
between  the  man  of  business  and  the  Bureau. 

The  entire  staff  of  the  Bureau,  counting  its  attaches  and 
trade  commissioners,  is  slightly  over  100. 

3.    The  U.  S.  Department  of  State  and  Foreign  Trade 
Promotion. 

There  is  a  great  deal  of  misconception  current  in  the  mind  of 
the  average  business  man  regarding  the  activities  of  the  State  De- 
partment in  the  promotion  of  foreign  trade.  It  is  generally  known 
that  the  consular  staff  which  is  directly  attached  to  the  State 
Department  is  charged,  among  other  duties  of  important  nature, 
with  the  promotion  of  the  interests  of  American  commerce  with- 
in the  local  sphere  of  the  activity  of  the  various  consulates  gen- 
eral, consulates  and  consular  agencies.    That  the  consuls  are  the 


DEPARTMENT  OF  STATE  501 

principal  compilers  of  those  reports  which  reach  the  American 
business  world  through  the  medium  of  Commerce  Reports,  a 
publication  of  the  Department  of  Commerce,  is  likewise  well 
known.  The  office  of  commercial  attaches  seems  to  indicate  an 
overlapping  of  the  activities  of  the  State  Department  and  of  the 
Department  of  Commerce,  and  finally  there  exists  in  the  Depart- 
ment of  State  a  division  known  as  the  Foreign  Trade  Adviser's 
office,  which  again  on  the  surface  would  seem  to  indicate  a  dup- 
lication of  efforts  by  two  important  executive  departments,  but 
as  will  be  pointed  out  below,  this,  indeed,  is  a  misconception. 

As  a  matter  of  fact  there  is  no  overlapping  or  duplication 
of  work  or  effort  whatsoever,  and  it  is  very  important  for  the 
American  business  man  to  know  just  wherein  the  functions  of 
the  various  branches  of  the  State  Department  as  relating  to  com- 
merce consist.  The  impression  lingering  in  many  minds  that  the 
Foreign  Trade  Adviser's  office  is  a  sort  of  a  vermiform  appendix, 
a  survival  of  the  days  previous  to  the  creation  of  the  Depart- 
ment of  Commerce,  is  altogether  inaccurate,  and  in  the  interest 
of  justice  to  a  very  efficient  organization  and  of  general  infor- 
mation, it  is  necessary  to  define  the  work  of  the  State  Depart- 
meit  as  distinct  in  its  aims  and  immediate  purpose  from  those 
of  the  Department  of  Commerce. 

With  regard  to  the  consular  officers  under  the  State  Depart- 
ment it  may  be  stated  that  they  are  instructed  to  report  regularly 
on  commercial  conditions  within  the  sphere  of  their  activity  to 
the  State  Department.  These  reports  are  studied  at  the  State 
Department  because  of  the  general  bearing  they  have  upon  in- 
ternational commercial  relations  and  are  then  passed  on,  after 
preliminary  editing,  to  the  Department  of  Commerce.  The 
Bureau  of  the  Foreign  and  Domestic  Commerce,  through  its 
editorial  staff,  prepares  the  information  for  publication  in  Com- 
merce Reports. 

The  consular  officers  of  the  United  States  are  overwhelmed 
by  private  correspondence  from  American  firms.  In  spite  of  be- 
ing inadequately  provided  with  help  or  with  funds  for  postage 
expenses,  etc.,  these  officers,  as  a  rule,  manage  to  give  each  Amer- 
ican correspondent  that  aid  or  advice  which  they  can  give  with- 
out offending  against  instructions :  they  cannot  undertake  to  give 
credit  information  on  the  standing  of  firms  or  undertake  the  col- 


502  INTEENATIONAL  COMMEKCE 

lection  of  accounts.  Correspondence  with  consular  officers  might 
preferably  be  carried  on  through  the  State  Department.  In  the 
interest  of  efficiency  American  business  men  should  not  apply 
direct  to  the  consular  officers  for  lists  of  names  or  other  infor- 
mation which  they  can  obtain  through  the  Department  of  Com- 
merce, or  strain  their  good-nature  and  readiness  to  serve  through 
imposing  upon  them  laborious  tasks  unnecessarily. 

Commercial  attaches  are  strictly  officers  of  the  Department 
of  Commerce,  but  are  accredited  to  the  embassies  for  the  two- 
fold purpose  of  increasing  their  prestige  and  of  enabling  them 
to  come  in  contact  with  the  authorities  in  the  countries  of  their 
activity,  which  as  a  matter  of  courtesy  and  precedent  can  only 
be  done  through  the  Department  of  State. 

The  Foreign  Trade  Adviser's  Office  in  the  State  Department 
does  not  undertake  to  furnish  information  to  commercial  in- 
quirers in  the  United  States,  its  activities  being  wholly  for  the 
benefit  of  the  Department  of  State  and  other  Departments  of 
the  Government. 

The  Department  of  State  is  responsible  for  the  relationships 
of  the  American  nation  to  foreign  nations,  and  a  great  part  of 
these  relationships  are  economic  or  commercial.  A  recent  com- 
mittee for  the  British  Foreign  Office  stated :  "There  cannot  be  a 
British  foreign  policy  as  regards  commercial  matters  abroad  sep- 
arate from  general  foreign  policy,  of  which  it  forms  an  integral 
and  important  part."  This  applies  equally  to  the  United  States  or 
to  any  other  nation. 

In  discharging  the  duty  of  the  Department  of  State  in  this 
connection  the  Foreign  Trade  Advisers'  Office  finds  it  necessary 
to  keep  constantly  advised  regarding  every  phase  of  American 
foreign  commerce;  and  frequently  to  make  recommendations 
for  plans,  or  to  secure  modifications  in  plans,  carried  out  partly 
through  the  Department  of  Commerce,  the  Federal  Trade  Com- 
mission, the  Tariff  Commission,  and  many  other  governmental 
bodies.  In  this  way  the  Foreign  Trade  Adviser's  Office  actually 
does  promote  the  trade  interests  of  the  United  States  incessantly 
and  to  a  very  important  degree. 

Although  the  Department  of  State  is  constantly  dealing  with 
a  variety  of  commercial  questions  arising  in  all  parts  of  the 
world,  a  majority  of  these  questions  are  settled  as  matters  of 


FOREIGN  TRADE  ADVISER  503 

routine,  are  treated  in  the  incipient  stage,  and  are  never  per- 
mitted to  become  questions  of  controversy  serious  enough  to  be 
discussed  in  the  press.  The  functions  of  the  State  Department 
are  to  conduct  the  foreign  affairs  of  the  country,  and  it  does 
not  come  into  administrative  contact  with  the  business  world. 
The  Department  of  State  is  intended  as  a  political  rather  than 
an  economic  department,  but  the  tendency  of  the  times  has  been 
to  lead  diplomacy  into  economic  paths.  Most  subjects  in  dispute 
between  nations  are  now  predominantly  economic  in  character. 
This  is  a  condition  which  will  be  even  more  accentuated  as  the 
years  go  by.  International  competition  will  be  henceforth  the 
competition  of  organized  nations  rather  than  of  industrial  groups. 
The  foreign  affairs  departments  of  every  great  nation  must  be 
thoroughly  posted  on  economic  subjects. 

Many  raw  materials  are  essential  for  the  maintenance  of 
"key"  industries.  The  control  of  certain  materials  gives  a  na- 
tion bargaining  power.  In  order  to  use  this  bargaining  power 
the  Department  of  State  must  have  a  thorough  insight  into  eco- 
nomic resources  of  other  countries.  For  this  reason  the  Depart- 
ment of  State  requires  a  Foreign  Trade  Adviser's  office  with 
a  staff  of  trained  economists,  which  equipment  was  introduced 
in  our  State  Department  only  in  the  summer  of  1919. 

The  economic  boycott  will  be  a  weapon  of  the  society  of  na- 
tions which  under  one  name  or  another  is  bound  to  be  organized. 
The  use  of  such  a  weapon  must  be  carefully  studied  by  the  State 
Department.  The  State  Department  must  undertake  the  duty 
of  faithfully  and  adequately  representing  the  economic  interests 
of  the  nation's  business.  The  Foreign  Trade  Adviser's  office 
reads  the  consular  reports  and  collects  information.  The  Bureau 
of  Foreign  and  Domestic  Commerce  distributes  it.  The  Section 
of  Economic  Intelligence  in  the  Foreign  Trade  Adviser's  office 
deals  with  the  broad  economic  and  commercial  questions  which 
arise  in  diplomacy,  involving  raw  materials,  tariff  changes,  im- 
migration restrictions,  banking  and  exchanges,  the  use  and  inter- 
pretation of  statistics.  The  section  is  divided  into  departments 
dealing  with  five  regions :  the  British  Empire  and  Western 
Europe;  Russia  and  Scandinavia;  Latin  America;  the  Far  East; 
Central  and  Southeastern  Europe.  Three  economists  are  at- 
tached to  each  section. 


504  INTERNATIONAL  COMMERCE 

The  Foreign  Trade  Adviser's  office  maintains  an  efficient 
library,  an  elaborate  clipping  and  indexing  service  and  a  statis- 
tical division.  It  co-operates  with  every  other  department  of  the 
government  which  deals  with  economic  questions.  It  keeps  in 
touch  with  commercial"  associations  such  as  the  Chamber  of 
Commerce  of  U.  S.  A.,  the  Chemical  Alliance,  the  Tanners' 
Council,  etc.  It  aims  to  supply  in  the  period  of  intense  com- 
petition after  the  war  an  economic  intelligence  service  compar- 
able to  the  general  staff  of  the  army  with  its  Military  Intelligence 
Division.  It  does  not  undertake  trade  promotion  in  the  direct 
sense  of  the  word,  which  is  a  function  most  satisfactorily  per- 
formed by  the  Department  of  Commerce,  but  aims  to  insure  that 
before  the  State  Department  formulates  a  policy  or  initiates  a 
course  of  action,  every  consideration  involving  American  for- 
eign trade  shall  have  been  presented  in  the  most  effective  and 
scientific  manner.  Nevertheless  indirectly  it  promotes  America's 
foreign  trade  most  efficiently. 

In  the  matter  of  export  restrictions,  for  instance,  which  pre- 
vailed during  the  war,  when  United  States  refused  to  ship  goods 
needed  by  the  merchants  of  a  neutral  country,  and  one  of  the 
Allies,  competing  with  the  United  States  in  the  neutral  market, 
relaxed  its  restrictions,  such  fact  was  noted  through  the  For- 
eign Trade  Adviser's  office  and  recommendations  of  a  specific 
nature  were  made.  Cases  where  America's  trade  is  apparently 
injured  or  in  danger  are  currenly  reported  and  lead  to  action. 
The  office  tests  the  currents  of  neutral  trade  and  watches  the 
pulse  of  neutral  opinion. 

The  complete  list  of  functions  which  form  the  program  of 
the  Foreign  Trade  Adviser's  office  embraces  the  following  four- 
teen points  : 
(1)   To  advise  the  Department  of  State  with  reference  to: 

(a)  the  bearing  of  any  proposed  policy  of  action  on  the  commercial 
interests  of  the  United  States; 

(b)  the  bearing  on  the  foreign  relations  of  the  country  of  any  eco- 
nomic policy,  proposed  for  adoption  by  the  United  States;  e.g.,  tariff 
changes,  immigration  restrictions,  nationalization  of  industries, 
blacklisting,  export  restrictions,  tonnage  allocation,  mercantile 
marine  development,  loans  abroad,  export  associations,  branch  banks, 
concessions,  etc. 


FOREIGN  TRADE  ADVISER  505 

(c)  the  position  of  nations  or  groups  of  nations  with  respect  to  the 
methods  and  effects  of  international  economic  competition  and 
control;  and 

(d)  the  relation  of  specific  aspects  of  international  co-operation  to 
the  interests  of  the  United  States;  e.  g.,  problems  arising  from  tho 
League  of  Nations,  inter-allied  or  international  control  of  tonnage, 
foodstuffs,  raw  materials,  etc.; 

(2)  To  assist  in  the  formulation  of  a  national  commercial  policy; 

(3)  To  prosecute  comprehensive  investigations; 

(4)  To  prepare  specific  reports  for  the  use  of  American  representatives 
engaged  in  the  negotiation  of  agreements  with  foreign  nations; 

(5)  To  prepare  and  keep  up-to-date  current  compendia  of  economic  in- 
formation relating  to  various  countries  and  to  other  special  sub- 
jects ; 

(6)  To  maintain  a  foreign  trade  library  and  file  in  the  State  Depart- 
ment; 

(7)  To  receive  official  communications  from  the  Department  of  Com- 
merce; 

(8)  To  transmit  communications  from  the  Department  of  Commerce 
with  reference  to  diplomatic  or  consular  action  for  the  promotion 
of  trade; 

(9)  To  prepare  instructions  for  Consular  officers  and  to  act  on  commu- 
nications from  the  Department  of  Commerce  with  reference  to  such 
instructions; 

(10)  To  transmit  to  the  Department  of  Commerce  communications  from 
American  diplomatic  and  consular  officers  relating  to  foreign  trade; 

(11)  To  distribute  to  other  appropriate  official  agencies  of  the  Govern- 
ment the  economic  information  which  is  communicated  to  the  De- 
partment of  State; 

(12)  To  act  on  economic  communications  to  the  Department  of  State 
from  unofficial  bodies; 

(13)  To  represent  the  Department  of  State  at  official  and  unofficial  con- 
ferences devoted  to  foreign  trade;  and, 

(14)  To  act  in  general  as  the  economic  agency  of  the  Department  of 
State. 

4.    The  War  Trade  Board. 

This  important  official  body  which  was  created  to  deal  with  the 
trade  of  United  States  with  foreign  countries  during  the  event- 
ful period  of  the  national  emergency  in  the  World  War  exem- 
plifies in  its  activities  that  wonderful  resourcefulness  which  is 
the  characteristic  of  the  American  people. 


506  INTERNATIONAL  COMMERCE 

The  Espionage  Act  which  was  passed  June  15,  191 7,  gave 
the  President  of  the  United  States  authority  to  control  exports. 
June  22, 1917,  this  control  was  placed  in  the  hands  of  the  Secretary 
of  Commerce.  On  August  21,  191 7,  an  Export  Administrative 
Board  was  established  which  operated  until  October  12,  1917, 
when  the  War  Trade  Board  was  created  by  executive  order. 

The  Trading  with  the  Enemy  Act,  October  6,  191 7,  mean- 
while gave  the  President  authority  to  control  imports  and  trad- 
ing with  the  enemy.  The  war  trade  policy  of  the  United  States 
was  to  conserve  the  domestic  supplies  of  the  United  States  and 
the  allied  nations,  to  prevent  trading  with  the  enemy,  and  to 
conserve  tonnage.  The  functions  of  the  War  Trade  Board  had 
the  aim  of  isolating  the  enemy  commercially  and  financially,  to 
obtain  essential  supplies  for  America  and  her  Allies  and  to  help 
conserve  ocean  tonnage.  The  purpose  of  isolating  the  enemy 
was  to  restrict  the  power  of  the  enemy  to  conduct  the  war  and 
to  destroy  the  world  trade  organization  of  the  enemy's  commer- 
cial interests.  The  War  Trade  Board  sought  to  control  enemy 
trade.  It  created  the  war  trade  intelligence  service  to  determine 
the  enemy  status  of  firms  and  of  goods,  issued  enemy  trading 
lists,  located  enemy  property  in  the  United  States  and  enemy 
stocks  in  neutral  countries.  It  achieved  most  valuable  results 
through  its  conservation  and  co-ordination  policy  in  connection 
with  exports  and  domestic  needs.  It  secured  relaxation  of  for- 
eign restrictions  in  connection  with  essential  needs  of  the  coun- 
try. It  checked  speculation  and  hoarding  in  numerous  instances. 
It  procured  tonnage  and  bunker  supplies.  Its  Bureau  of  Re- 
search and  Investigations  has  been  of  inestimable  service  to  the 
interests  of  American  trade. 

While  not  strictly  a  trade  promoting,  but  a  trade  regulating 
body,  the  War  Trade  Board  left  an  indelible  impress  upon  Amer- 
ican commerce  during  the  period  of  its  activity. 

B.     Foreign  Trade  Promotion  Through  Organ- 
izations of  Nation-Wide  Scope. 

In  the  variety  of  expressions  of  public  life  in  America,  not 
so  long  ago  it  was  felt  that  the  interests  of  the  business  com- 
munity, or  rather  the  business  interests  of  the  nation  were  not 


NATIONAL  FOREIGN  TRADE  COUNCIL  507 

reflected  with  sufficient  force  and  clearness.  This  led  the  busi- 
ness world  of  the  American  nation  to  seek  a  remedy  for  the  un- 
satisfactory effects  of  this  condition  through  associating  in  bodies 
of  nation-wide  scope.  The  results  of  these  efforts  at  organization 
have  been  indeed  of  such  a  nature  as  to  deserve  a  thorough 
study  of  the  economist,  the  ordinary  business  man  and  in  fact 
any  patriotic  American  citizen  interested  in  the  commercial  pro- 
gress of  the  nation. 

Among  these  organizations  the  following  will  form  the 
theme  of  our  consideration:  the  National  Foreign  Trade  Coun- 
cil; the  Chamber  of  Commerce  of  U.  S.  A.;  the  National  Asso- 
ciation of  Manufacturers;  the  American  Manufacturers  Export 
Association;  the  Philadelphia  Commercial  Museum;  the  Amer- 
ican Exporters  and  Importers  Association;  the  Council  on  For- 
eign Relations  and  the  Tanners'  Council  of  U.  S.  A. 

i.    The  National  Foreign  Trade  Council. 

The  National  Foreign  Trade  Council  is  an  organization  of  about  75 
leaders  of  finance,  commerce,  industry  and  transportation,  representing 
all  sections  of  the  United  States  and  all  factors  of  American  interna- 
tional commerce.  The  council  was  organized  pursuant  to  a  resolution 
adopted  by  the  First  National  Foreign  Trade  Convention,  held  in  Wash- 
ington in  May  1914.  That  was  a  critical  time  for  domestic  industry  and 
commerce.  The  industrial  productive  capacity  of  the  United  States  had 
developed  to  a  point  where  it  was  capable  of  producing  substantially 
more  than  was  required  for  domestic  consumption,  and  leaders  of  Amer- 
ican enterprise  saw  that  the  time  was  at  hand  when  the  United  States 
must  embark  upon  a  definite  course  of  development  of  foreign  trade,  in 
order  to  provide  sure  markets  for  our  surplus  productive  capacity,  and 
so  to  stabilize  domestic  industry  and  provide  against  depression  and 
hard  times. 

In  order  to  consider  the  problems  arising  out  of  that  situation,  a 
National  Foreign  Trade  Convention  was  called  to  meet  in  Washington 
the  latter  part  of  May,  1914,  under  the  auspices  of  the  American  Manu- 
facturers Export  Associaton,  the  American  Asiatic  Association  and  the 
Pan-American  Society  of  the  United  States.  That  Convention  was  at- 
tended by  more  than  400  delegates  who  represented  a  hundred  indus- 
trial and  commercial  organizations  from  all  sections  of  the  United 
States. 

The  council  has  a  membership  composed  of  manufacturers,  mer- 
chants, farmers  and  other  producers  of  natural  commodities,  railroad  and 
steamship    men,    bankers   and    others,    representing   all    sections    of    thq 


508  INTEENATIONAL  COMMEECE 

United  States  and  collectively  standing  for  the  general  interest  of  all 
elements  engaged  in  foreign  trade.  It  is  a  national  committee  for  the 
welfare  of  international  commerce.  Its  members  do  not  represent  upon 
it  their  own  companies,  but  serve  as  representatives  of  the  particular 
class  of  business  with  which  they  are  affiliated.  Nor  do  members  repre- 
sent exclusively  their  own  section  of  the  country. 

The  members  collectively  reflect  the  interest  of  the  various  pro- 
ductive, commercial,  transportation  and  financial  elements  in  foreign 
trade,  permitting  a  concentration  of  experienced  judgment  admirably 
adapted  to  yield  conclusions  and  recommendations  truly  national  in 
scope.  The  Council  performs  no  commercial  functions  for  its  individual 
members  that  they  do  not  share  with  thousands  of  others  who  receive  its 
publications.  The  members  support  the  work  of  the  Council  as  a  public 
duty. 

In  the  execution  of  its  duties  the  Council  calls  each  year  a  National 
Foreign  Trade  Convention  in  which  it  invites  the  participation  of  all 
those  interested  in  or  connected  with  any  phase  of  foreign  trade,  in 
every  part  of  the  country,  as  well  as  American  representatives  of  Amer- 
ican enterprise  abroad. 

The  Sixth  National  Foreign  Trade  Convention  which  was  held  in 
Chicago  in  April  1919  was  the  largest  in  point  of  attendance  of  the  series, 
and  most  thoroughly  representative  of  the  whole  country,  both  geogra- 
phically and  industrially.  The  largest  previous  attendance  was  1206  at 
the  Fourth  Convention  held  in  Pittsburgh  in  January,  1917.  At  Chicago 
there  were  nearly  2000  registered  delegates,  most  all  of  whom  were  ac- 
tually in  attendance.  Delegates  were  present  from  38  different  states 
and  there  were  representatives  of  107  domestic  Chambers  of  Commerce, 
and  nearly  all  of  the  American  Chambers  of  Commerce  in  foreign  coun- 
tries. 

This  Convention  terminated  with  the  adoption  of  a  declaration  con- 
stituting the  most  authoritative  statement  of  the  needs  of  American  over- 
seas commerce  ever  presented  by  the  representatives  of  that  commerce. 

The  latest  expression  of  the  patriotic  and  statesmanlike  ac- 
tivity of  the  National  Foreign  Trade  Council  and  of  its  leader 
and  guiding  genius,  the  public-spirited  American  leader  of  indus- 
try James  A.  Farrell,  is  to  be  seen  in  the  magnificent  plan  just 
launched  to  secure  an  endowment  of  $1,000,000  for  a  school  of 
foreign  trade  and  commerce  in  connection  with  the  university 
at  Georgetown. 

2.    Chamber  of  Commerce  of  the  United  States 
of  America. 

The  Chamber  of  Commerce  of  the  United  States  is  a  federation  of 
commercial  organizations  formed  in  1912  "for  the  purpose  of  encouraging 
trade  and  commercial  intercourse  between  the  states,  the  territories  and. 


CHAMBER  OF  COMMERCE  OF  U.  S.  A.  509 

insular  possessions  of  the  United  States  of  America  and  with  foreign 
nations,  and  of  promoting  co-operation  between  chambers  of  sommeree, 
boards  of  trade,  and  other  commercial  and  manufacturers'  organizations 
of  the  United  States,  increasing  their  efficiency  and  extending  their  use- 
fulness. It  is  intended  to  secure  co-operative  action  in  the  advancement 
of  the  common  purposes  of  its  members,  uniformity  and  equity  in  busi- 
ness usages  and  laws,  and  of  the  financial,  commercial,  civic  and  indus- 
trial interests  of  the  country  at  large."  This  latter  action  is  largely  ac- 
complished through  the  workings  of  a  referendum  system  designed  to 
meet  the  needs  of  the  national  chamber,. 

Membership. — Every  commercial  or  manufacturers'  association  not 
organized  for  private  purposes  is  eligible  for  membership  in  the  national 
chamber.  Such  organizations  are  of  two  classes — local  or  state  commer- 
cial and  business  organizations  whose  chief  purpose  is  the  development 
of  the  commercial  and  industrial  interests  of  a  single  state,  city  or  local- 
ity; and  local,  state,  interstate  or  national  organizations  whose  mem- 
bership is  confined  to  one  trade  or  group  of  trades. 

In  addition,  persons,  firms,  and  corporations  who  are  members  of 
any  organization  admitted  to  the  national  chamber  are  eligible  for  elec- 
tion as  individual  members. 

The  organization  members  now  number  over  1200  chambers  of  com- 
merce and  trade  associations,  with  a  membership  of  approximately 
1,000,000. 

The  most  important  action  of  the  Chamber  of  Commerce  of  the 
United  States  is  to  ascertain  business  opinion  throughout  the  country 
upon  the  more  important  measures  affecting  commerce,  for  the  considera- 
tion of  those  officials  or  legislative  bodies  that  have  power  to  put  these 
measures  into  effect.  This  is  successfully  accomplished  by  the  refer- 
endum. 

The  Chamber  arranged  an  arbitration  agreement  with  the  Bolsa  de 
Comercio  of  Buenos  Aires,  by  which  international  commercial  disputes 
may  be  expeditiously  adjusted  in  a  fair  and  impartial  manner  at  small 
cost  to  the  parties  concerned,  was  the  forerunner  of  similar  agreements 
effected  or  about  to  be  effected  with  nationally  representative  commer- 
cial organizations  in  Uruguay,  Brazil,  and  Ecuador.  This  system  of  arbi- 
tration promises  to  extend  to  other  fields  than  Latin  America  and  is  a 
distinct  contribution  to  foreign-trade   development. 

At  the  forty-seventh  meeting  of  the  Board  of  Directors  in  St.  Louis 
in  April,  1919,  a  reorganization  of  the  work  of  the  Chamber  was  decided 
upon  to  include  the  following  seven  divisions:  Industrial  production, 
domestic  distribution,  finance,  foreign  commerce,  transportation,  insur- 
ance, civic  development. 

The  Chamber  is  convening  a  national  trade  conference  in  Atlantic 
City,  scheduled  for  the  end  of  October,  1919,  which  will  be  also  at- 
tended by  many  foreign  economic  delegates.  An  important  program  has 
been  arranged. 


510  INTERNATIONAL  COMMERCE 

3.     Other  National  Organizations. 

a)    The  National  Association  of  Manufacturers 
of  the  United  States  of  America. 

The  National  Association  of  Manufacturers  of  the  United  States  of 
America  is  an  organization  established  twenty-five  years  ago  and  charged 
by  its  founders  with  two  especial  duties,  namely,  the  promotion  of  in- 
dustry at  home  and  the  encouragement  of  trade  with  all  other  lands. 

In  carrying  out  the  second  of  these  duties  the  Association  sent  com- 
missioners of  its  members  and  also  special  commissioners  to  many  coun- 
tries to  study  their  trade  possibilities  and  the  reports  of  these  investiga- 
tions were  issued  in  pamphlet  form  and  widely  distributed.  These  re- 
ports stimulated  that  direct  interest  in  export  trade  on  the  part  of  manu- 
facturers which  has  continued  to  grow  ever  since  the  founding  of  the 
Association  in  1895.  At  the  same  time  the  Association  began  the  build- 
ing up  of  a  service  department  for  those  interested  in  foreign  trade. 
This  Foreign  Trade  Department  of  the  Association  is  widely  known  at 
home  and  abroad  for  its  effective  work  in  aiding  the  exporting  manufac- 
turer and  foreign  merchant. 

In  order  to  carry  on  this  work  promptly  and  efficiently  the  Asso- 
ciation maintains  on  the  staff  of  its  Foreign  Trade  Department  a  large 
corps  of  experts  who  have  had  practical  experience  in  the  various 
branches  of  foreign  trade  abroad  and  at  home. 

The  Foreign  Trade  Department  is  divided  into  the  following  divi- 
sions:  The  Latin -American,  the  Russian  and  the  Far  Eastern. 

Each  of  these  divisions  is  in  charge  of  one  or  more  persons  having 
had  long  experience  in  the  commercial  and  financial  affairs  of  the  re- 
gions mentioned.  Other  parts  of  the  world  are  looked  after  by  other 
members  of  the  staff  who  are  natives  of  various  countries.  The  Asso- 
ciation also  maintains  in  its  Foreign  Trade  Department  highly  efficient 
bureaus  for  transportation,  credit  information,  trade  marks,  compila- 
tions and  general  importation. 

The  work  of  the  Foreign  Trade  Department  is  supplemented  by  the 
services  of  nearly  three  thousand  correspondents  located  in  every  eity 
and  town  of  commercial  importance  throughout  the  world. 

The  Association,  through  its  Foreign  Trade  Department  and  other 
channels  also  issues  periodicals  and  other  matter  in  book  or  pamphlet 
form  for  the  information  and  benefit  of  those  interested  in  world  trade 
in  all  lands  whether  the  manufacturers,  exporters,  importers,  dealers  or 
students.     Among  them  are: 

A  monthly  magazine  for  circulation  in  the  United  States,  a  number 
of  pages  of  which  is  devoted  to  foreign  trade  and  financial  matters  re- 
lating to  commerce.     Four   monthly   magazines  printed   respectively  in 


MANUFACTURERS'  ASSOCIATIONS  511 

English,  Spanish,  French  and  Portuguese,  especially  for  circulation  in 
foreign  countries.  A  volume  issued  periodically  in  hound  form  and  care- 
fully indexed  in  six  languages  for  the  especial  benefit  of  the  importer 
and  dealer  abroad  who  desires  to  learn  the  names  of  leading  makers  of 
any  manufactured  article  in  which  he  may  be  interested.  A  confidential 
bulletin  issued  twice  a  month,  affording  reputable  business  men  abroad 
the  means  of  having  their  wants  brought  directly  to  the  attention  of 
American  makers  of  their   goods,  without  charge   to   themselves. 

Special  foreign  trade  bulletins  and  pamphlets  giving  authoritativo 
information  regarding  the  commerce  and  trade  possibilities  of  various 
countries. 

Exhibits  and  pamphlets  showing  through  facsimile  illustrations  the 
various  documents  necessary  in  the  handling  of  an  export  order,  es- 
pecially for  the  use  of  students  and  beginners  in  export  trade. 

Among  the  various  activities  of  the  National  Association  of  Manu- 
facturers along  the  lines  of  foreign  trade  promotion  we  may  mention 
the  following:  the  establishment  of  sample  warehouses  abroad,  recipro- 
city conventions  and  foreign  trade  conferences,  export  tours  of  Amer- 
ican ports,  the  entertainment  of  foreign  business  men  and  officials  visit- 
ing United  States  and  facilitating  their  missions. 

b)    The  American  Manufacturers  Export  Association. 

The  American  Manufacturers  Export  Association,  which  was  incor- 
porated in  1911,  occupies  an  unique  place  in  the  world  of  commerce;  it 
ip  the  only  organization  of  its  exact  nature,  and  its  work  is  endorsed  by 
the  United  States  Government  and  the  leading  manufacturers  of  this 
country.  It  is  co-operative  in  all  of  its  phases;  it  has  nothing  to  gain 
beyond  the  furtherance  of  its  original  pledge  to  foster  and  promote  the 
business  and  commercial  relations  between  American  manufacturers  and 
foreign  nations.  This  Association  was  very  largely  instrumental  in 
creating  and  bringing  to  a  successful  culmination  the  National  Foreign 
Trade  Convention  held  in  Washington  in  May,  1914,  which  attracted  at- 
tention all  over  the  world  and  which  was  conceded  to  be  the  first  prac- 
tical movement  of  its  kind  and  the  most  representative  every  carried  out. 
It  has  also  since  co-operated  with  the  National  Foreign  Trade  Council 
in  its  later   meetings  and  activities. 

The  Association  is  in  close  touch  and  constant  communication  with 
the  United  States  consular  representatives  abroad,  the  important  Cham- 
bers of  Commerce  and  other  commercial  bodies  in  all  foreign  countries, 
in  which  direction  likewise  the  policy  of  mutual  co-operation  exists.  It 
also  possesses  its  own  correspondents  throughout  the  world.  The  Asso- 
ciation maintains  an  office  in  Washington  with  a  competent  official  in 
charge. 


512  INTERNATIONAL  COMMERCE 

The  Association  has  taken  an  active  part  in  promoting  the  best  in- 
terests of  American  foreign  trade.  Its  directors  have  been  prominently 
identified  with  every  worthy  movement  in  this  connection,  without  fall- 
ing into  the  error  of  espousing  any  party  position. 

The  Association  holds  monthly  conferences  with  addresses  by  pro- 
minent speakers,  and  annual  gatherings,  generally  convoked  to  consider 
the  vital  problems  of  the  day  in  American  international  commerce.  The 
Association  publishes  a  journal  of  importation  for  members  under  the 
name  of  "Weekly  Bulletin,"  but  does  not  engage  directly  or  indirectly  in 
any  enterprise  for  profit. 

c)    The  Philadelphia  Commercial  Museum. 

The  Philadelphia  Commercial  Museum  acts  as  a  clearing  house  of 
information  on  all  questions  pertaining  to  export  trade.  It  supplies  in- 
formation on  foreign  trade  opportunities,  business  conditions,  reputation 
and  responsibility  of  foreign  merchants,  shipping  rates  and  routes,  cus- 
toms tariffs,  commercial  travelers'  licenses  and  taxes,  trade  mark  and 
patent  regulations  of  foreign  countries — in  fact  on  any  subject  connected 
with  the  development  of  export  trade. 

It  helps  manufacturers  to  establish  relations  with  reliable  foreign 
merchants  and  aids  them  to  select  competent  and  trustworthy  agents 
abroad. 

In  its  files  it  has  records  of  many  hundreds  of  thousands  of  foreign 
importing  houses,  dealers  and  industrial  organizations.  It  is  in  close 
and  frequent  communication  with  commercial  organizations,  banking  in- 
stitutions, information  bureaus,  governmental  departments,  prominent 
importers,  shipping  companies,  special  agents  and  correspondents  in  all 
parts  of  the  world. 

Although  located  in  Philadelphia  and  supported  in  a  measure  by  ap- 
propriations by  that  city  and  by  the  State  of  Pennsylvania,  it  is  con- 
ducted in  the  interest  of  manufacturers  in  all  parts  of  the  United  States 
and  is  used  by  hundreds  of  them  in  the  transaction  of  their  foreign  busi- 
ness. 

The  Library  maintained  by  the  Commercial  Museum  is  unique  in 
many  respects  and  is  probably  the  most  complete  of  its  kind,  specializing 
in  literature  pertaining  to  trade,  commerce  and  industries  of  all  coun- 
tries, comprising  over  50,000  volumes  and  many  hundreds  of  trade  pub- 
lications, statistical  reports,  foreign  directories,  official  gazettes,  foreign 
year  books  and  similar  publications. 

The  Foreign  Trade  Bureau  is  practically  dependent  upon  its  sub- 
scribing manufacturers  who  are  utilizing  its  facilities.  The  fees  charged 
for  services  are  graded  according  to  the  extent  and  nature  of  the  ser- 
vice rendered. 


NATIONAL  ORGANIZATIONS  513 

The  Institution  issues  two  publications — one  "Commercial  America" 
which  is  issued  in  both  English  and  Spanish, — (the  Spanish  under  the 
name  of  "America  Comercial")— the  other,  "The  Weekly  Export  Bul- 
letin." 

The  Commercial  Museum  was  organized  about  25  years  ago  and 
through  the  liberal  support  given  to  it  by  the  City  of  Philadelphia,  the 
State  of  Pennsylvania  and  manufacturers  throughout  the  United  States, 
it  has  succeeded  in  establishing  foreign  connections  through  which  it 
has  collected  an  immense  amount  of  valuable  data,  which  is  being  added 
to  daily  by  reports  received  from  foreign  correspondents  and  agents 
by  the  accession  of  literature  of  an  official  and  commercial  nature. 

The  institution  is  directed  by  a  Board  of  Trustees  appointed  for 
life  and  serving  without  compensation.  The  Institution  is  in  no  sense 
a  profit  making  organization. 

d)    The  American  Exporters  and  Importers  Association. 

This  Association  of  export  and  import  merchants  was  formed  for  the 
promotion  of  foreign  trade  and  the  solution  of  business  problems  gen- 
erally. 

In  1911,  a  Committee  of  Exporters  had  various  conferences  with 
Committees  from  Manufacturers'  Associations,  at  which  both  sides  ex- 
pressed their  grievances,  and  all  grievances  were  frankly  discussed  and 
satisfactorily  adjusted.  The  Exporters  Committee  explained  the  various 
problems  and  intricacies  of  foreign  trade,  and  suggested  many  ways  by 
which  manufacturers  could  extend  their  trade  in  foreign  fields. 

In  1912,  ocean  freight  rates  from  New  York  to  the  River  Plate  were 
exorbitant,  and  the  Association  was  successful  in  securing  an  adjustment 
of  rates  to  conform  with  those  from  Liverpool,  and  in  obtaining  special 
rates  on  certain  commodities.  This  was  possible  only  by  concerted  ac- 
tion on  the  part  of  the  exporters. 

In  1913,  freight  rates  to  Australia  were  advanced,  these  advances 
seeming  unjustified;  and  the  Association,  supported  by  its  members,  sec- 
ured an  adjustment  of  rates  to  conform  with  those  from  Liverpool  and 
London  on  the  same  commodities,  thereby  placing  American  shippers  on 
the  same  basis  as  those  operating  from  abroad  to  the  Australian  ports. 

When  the  war  broke  out  in  1914,  numerous  problems  arose  from  day 
to  day,  with  which  it  was  possible  to  cope  only  through  co-operation  by 
all  exporters.  Freight  contracts  made  in  good  faith  at  lower  rates,  were 
repudiated  when  freight  rates  were  soaring  skyward;  and  it  required 
energetic  and  earnest  work  on  the  part  of  the  Association  to  obtain  pro- 
tection for  the  old  contracts.  Then  there  arose  the  various  questions  of 
excessive  charges  for  the  transmission  of  cables,  transportation,  cartage, 
war  risk  insurance.  The  Committees  of  the  Association  were  continu- 
ously at  work  trying  to  overcome  the  obstacles  which  were  constantly 
threatening  to  strangle  the  foreign  commerce  of  the  country. 


514  INTERNATIONAL  COMMERCE 

The  Association's  War  Trade  Committee  obtained  from  the  War 
Trade  Board  an  extension  of  time  on  export  licenses  from  90  days  to  six 
months,  which  was  a  boon  to  manufacturers,  who  were  producing  under 
severe  handicaps  and  were  frequently  unable,  even  with  the  utmost  ef- 
fort, to  deliver  their  goods  within  the  prescribed  90  days. 

This  Association  to-day  represents  an  annual  turnover  in  American 
foreign  trade  aggregating  over  a  billion  dollars.  It  contains  among  its 
members  some  of  the  oldest  and  most  highly  respected  houses  in  the 
export  trade  of  America. 

e)    The  Council  on  Foreign  Relations. 

The  Council  on  Foreign  Relations  is  an  organization  of  interested 
and  informed  people  with  the  patriotic  desire  to  help  their  national  life 
and  their  relations  with  foreign  countries.  The  Council  has  no  selfish 
purposes  nor  political  bias.  Past  conferences  show  that  much  is  learned 
and  much  good  is  accomplished  through  the  Council's  activities. 

The  Council  is  an  organization  of  limited  membership  and  brings 
together  at  its  conferences  not  only  members  but  guests  likely  to  be  in- 
terested in  the  topic  under  discussion.  Several  ten  minute  talks  are 
given  by  speakers  especially  qualified  to  deal  with  the  subject  under 
discussion  and  through  these  several  talks  a  well  rounded  out  discussion 
is  possible. 

f )    The  Tanners'  Council  of  the  United  States 
of  America. 

The  Tanners'  Council  of  the  United  States  of  America  is  an  organ- 
ization that  is  national  in  scope,  but  embraces  only  the  leather  and  allied 
industries.  It  it  a  pioneer  organization  of  its  kind,  and  the  great  suc- 
cess which  it  has  achieved  from  the  start  will  doubtless  lead  other  in- 
dustries to  organize  in  a  similar  manner.  The  Tanners'  Council  was 
formed  shortly  after  the  United  States  entered  the  great  war,  by  co- 
operation among  formerly  existing  associations,  for  the  purpose  of  as- 
sisting the  government  in  its  war-time  control  of  the  production  of 
leather  and  of  the  trade  in  raw  materials  required  for  tanning.  It  is 
now  the  sole  permanent  and  national  organization  of  the  entire  tanning 
industry. 

The  Secretary  of  the  Tanners'  Council  is  a  former  assistant  chief 
of  the  Bureau  of  Foreign  and  Domestic  Commerce.  Its  Foreign  Trade 
Department  is  in  charge  of  another  prominent  former  government  of- 
ficial who  has  a  vast  experience  in  foreign  fields.  Co-operating  with 
the  government  agencies  for  the  promotion  of  foreign  trade,  and  open- 
ing direct  connections  with  all  foreign  markets,  the  Foreign  Trade  De- 
partment of  the  National  Foreign  Council  has  already  proved  a  valuable 
asset  in  the  extension  of  our  foreign  trade  in  the  products  of  the  tan- 


LOCAL  ORGANIZATIONS  515 

ning  industry.  The  Council  has  adopted  an  emblem,  issues  a  publication 
"American  Leather"  in  English,  Spanish  and  French,  publishes  bulletins, 
and  operates  an  information  bureau  which  keeps  tab  on  all  events  of 
interest  to  the  tanning  industry  throughout  the  world.  It  lias  been  in- 
strumental in  bringing  to  the  notice  of  the  government  and  in  remedy- 
ing conditions  which  militated  against  the  success  of  our  foreign  trade  in 
leather  and  allied  products,  and  managed  a  most  creditable  exhibit  at 
the  Lyons  Sample  Fair  in  the  spring  of  1919. 


C.     Foreign  Trade  Promotion  Through  Local 
Organizations. 

The  interest  taken  in  foreign  trade  promotion  throughout 
the  country  is  evidenced  in  many  ways.  In  the  present  consid- 
eration we  are  concerned  with  an  analysis  of  the  ways  and 
means  in  which  local  organizations  such  as  chambers  of  com- 
merce and  boards  of  trade  can  foster  and  encourage  and  aid 
the  foreign  trade  activities  of  their  members. 

The  chamber  of  commerce  in  America  is  a  free  association 
and  has  not  that  official  status  which  characterizes  chambers  of 
commerce  in  European  countries  outside  of  England.  From 
many  points  of  view  it  is  a  great  advantage  since  it  leaves  these 
organizations  untrammeled  by  official  interference  in  the  free 
development  of  those  spheres  of  usefulness  which  appear  desir- 
able or  requisite  from  the  point  of  view  of  local  needs. 

In  connection  with  foreign  trade,  it  is  well  for  local  cham- 
bers of  commerce  to  study  those  activities  in  which  they  can  en- 
gage profitably  to  their  members,  those  activities  which  they 
best  leave  alone,  and  those  activities  which  may  be  dictated  by 
peculiar  local  conditions,  though  inapplicable  to  the  general  run 
of  chambers  of  commerce. 

The  foreign  trade  department  of  a  local  chamber  of  com- 
merce can  best  serve  its  members  by  being  the  recognized  nucleus 
of  gatherings,  discussions  and  services  relating  to  local  interests 
in  foreign  trade.  It  will  not  seek  to  engage  in  work  for  which 
a  local  organization  is  manifestly  unfitted,  since  it  requires  re- 
sources beyond  its  capacity.  For  all  such  work  it  will  advise  its 
members  to  look  to  such  organizations  of  nation-wide  scope  in 
which  they  can  secure  membership. 


51G  INTERNATIONAL  COMMEECE 

Thus  the  local  chamber  of  commerce  will  not  undertake  to 
furnish  credit  reports.  Credit  reports  should  be  obtained  through 
the  regular  mercantile  agencies,  through  the  National  Associa- 
tion of  Manufacturers,  the  American  Manufacturers'  Export 
Association,  the  Philadelphia  Commercial  Museum,  through 
banks,  etc. 

With  regard  to  translations,  it  will  seek  to  keep  a  file  of 
persons  in  the  vicinity  who  are  thoroughly  competent  to  trans- 
late from  and  into  various  languages,  and  lacking  such  should 
refer  its  members  to  organizations  which  maintain  efficient  trans- 
lation bureaus.  Only  in  exceptional  cases,  in  the  larger  cities, 
will  it  find  possible  to  maintain  a  translation  bureau  of  its  own. 

The  local  chamber  of  commerce,  through  the  head  of  its 
foreign  trade  department,  should  keep  in  active  touch  with  the 
Bureau  of  Foreign  and  Domestic  Commerce.  Several  chambers 
of  commerce  have  made  arrangements  with  that  official  body  to 
act  as  its  adjunct  in  their  cities.  It  will  also  find  it  advisable  to 
keep  itself  in  the  closest  touch  with  such  organizations  of  na- 
tion-wide scope  as  are  described  in  the  preceding  chapter. 

The  work  of  the  foreign  trade  department  of  a  local  cham- 
ber of  commerce  may  be  divided  into  informative,  educational 
and  promotional.  For  the  informative  work  the  chamber  of  com- 
merce can  little  by  little  equip  itself  with  maps  and  atlases, 
Lippincott's  Gazetteer,  Exporters'  Encyclopedia,  books  on  for- 
eign trade,  books  on  special  countries,  statistical  and  other  pub- 
lications of  the  Department  of  Commerce,  an  indexed  file  of  Com- 
merce Reports,  directories  of  foreign  countries,  such  as  Kelly's 
Directory  of  the  World,  and  other  directories  which  can  be  pur- 
chased either  in  .America  or  abroad.  The  use  of  these  directo- 
ries in  many  instances  presupposes  a  knowledge  of  foreign  lan- 
guages. 

It  is  also  advisable  to  keep  current  copies  of  all  export  peri- 
odicals, and  endeavor  by  an  exchange  arangement  for  the  Cham- 
ber of  Commerce  Bulletin  to  receive  copies  of  the  foremost  for- 
eign trade  papers. 

A  very  profitable  form  of  activity  is  to  make  the  name  of 
the  city  in  which  the  chamber  of  commerce  is  located  better 
known  throughout  the  world.  The  head  of  the  foreign  trade  de- 
partment of  the  chamber  may  devise  some  striking  publicity  mat- 


LOCAL  ORGANIZATIONS  517 

ler  for  various  countries,  in  the  language  of  the  countries  con- 
cerned and  pass  it  on  through  a  chamber  of  commerce  in  each 
strategic  center  of  the  world's  commerce.  American  chambers 
of  commerce  abroad  may  be  utilized  for  this  purpose.  Catalogs 
of  all  members  interested  in  foreign  trade  should  be  sent  to  all 
American  consulates. 

In  every  city  of  commercial  importance  in  America  there  is 
some  peculiar  reason,  some  specific  foundation  for  its  develop- 
ment and  progress,  some  natural  advantage,  some  outstanding 
expression  of  local  industrial  enterprise  that  has  shaped  its  des- 
tiny. To  bring  these  points  out,  to  let  the  world  outside  of  the 
United  States  know  of  them,  is  to  bring  local  industries  by  that 
much  closer  to  the  minds  of  the  commercial  people  throughout 
the  world. 

It  means  that  the  world  at  large  which  connects  Pittsburgh 
with  steel,  Chicago  with  packing  products,  Detroit  with  auto- 
mobiles, Cincinnati  with  machine  tools,  Boston  with  shoes  and 
leather,  should  be  made  even  more  intimately  acquainted  with 
other  cities,  and  even  with  the  numerous  activities  of  these  great 
cities  beyond  the  industries  named.  The  striking  domestic  pub- 
licity campaign  of  Kansas  City  may  serve  as  a  pattern,  with 
proper  modifications,  for  a  "boosting"  campaign  abroad. 

Many  chambers  of  commerce  recognize  this,  but  they  should 
encourage  the  heads  of  their  foreign  departments  to  utilize  all 
reasonable  methods  of  publicity  abroad  to  make  their  home  city 
known  for  the  things  in  which  it  claims  special  merit.  Country 
by  country  should  be  taken  up,  from  those  nearest  to  America 
in  commercial  relations  to  the  most  distant.  Space  and  lack  of 
commercial  intercourse  are  obstacles  that  will  vanish  before  long. 
Abyssinia,  Afganistan,  Persia,  Thibet,  Central  Africa  will  to- 
morrow be  buyers.  Missionary  work  now  in  the  most  distant 
countries  will  give  the  members  of  an  enterprising  local  chamber 
of  commerce  a  great  advantage.  Manufacturers  are  to-day  sell- 
ing products  in  Sumatra  who  in  19 15  thought  that  Sumatra  was 
the  trade  name  for  a  cigar  wrapper.  And  only  in  1914  the  Min- 
ister of  Railways  in  one  of  the  greatest  European  countries  had 
to  be  told  that  Seattle  was  a  Pacific  Port  in  the  United  States. 

Half  a  dozen  chambers  of  commerce,  a  dozen,  if  need  be, 
may  unite  in  sending  an  informative  mission,  with  a  set  of  films, 


518  INTERNATIONAL  COMMERCE 

in  charge  of  persons  speaking  various  languages,  or  hiring  such 
persons  on  the  way,  and  advertise  our  great  commercial  cities 
and  their  products.  Such  an  enterprise  will  repay  itself  beyond 
measure  by  getting  the  importers  abroad  to  understand  the  vari- 
ety of  resources  hidden  in  our  industrial  cities. 

The  foreign  trade  departments  of  local  chambers  of  com- 
merce should  hold  special  conventions  and  conferences  of  their 
committees,  in  order  to  compare  notes,  to  learn  from  one  an- 
other and  to  help  one  another.  There  are  many  ways  in  which 
singly  they  cannot  make  a  showing  worth  while,  but  as  an  asso- 
ciation of  the  foreign  trade  departments  of  American  chambers 
of  commerce  they  might  engage  in  a  variety  of  functions  which 
are  now  closed  to  them.  Perhaps  the  Chamber  of  Commerce 
of  the  United  States  of  America  might  organize  a  central  sub- 
sidiary organization  of  such  foreign  trade  departments  furnish- 
ing them  a  central  service. 

Organized  in  this  manner,  foreign  trade  departments  could 
at  a  very  low  cost  per  chamber  or  member  maintain  correspon- 
dents and  representatives,  at  first  in  a  few  selected  strategic  cen- 
ters of  the  world's  commerce,  then  extending  this  network  of 
representatives,  and  it  would  be  the  business  of  these  representa- 
tives to  work  in  the  interests  of  each  chamber  of  commerce. 

Chambers  of  commerce  may  devise  ways  and  means  to  at- 
tract foreign  visitors  and  offer  them  their  facilities.  They  may 
encourage  visits  of  their  members  to  foreign  countries  and  they 
must  interest  their  members  going  abroad  in  boosting  their  city 
wherever  they  go.  There  cannot  be  too  much  publicity  work  in 
this  connection,  and  it  all  rebounds  to  the  benefit  of  the  entire 
commercial  community. 

It  is  advisable  to  get  the  members  together  at  luncheons  or 
dinners  and  to  provide  speakers  worth  while  who  should  address 
them  on  topics  of  vital  interest. 

Wherever  possible,  the  subject  of  education  in  foreign  trade 
should  be  encouraged.  If  within  the  sphere  of  the  local  cham- 
ber of  commerce  activity  there  is  a  college  giving  instruction  in 
some  phase  of  foreign  trade,  there  should  be  a  most  intimate 
relation  between  the  chamber  of  commerce  and  the  school.  Ex- 
port managers  of  members  should  be  induced  to  organize  classes 
in  foreign  trade.    The  education  of  the  employees  of  export  de- 


CHAMBERS  OF  COMMERCE  519 

partments  in  matters  relating  to  international  commerce  should 
be  promoted  in  every  way. 

Great  progress  has  been  made  by  many  local  organizations 
in  the  promotion  of  foreign  trade  activities,  and  to-day  excellent 
foreign  trade  bureaus  are  maintained  by  the  following  chambers 
of  commerce : 

Cincinnati. — Established  many  years,  services  free  to  members  of  the 
Chamber  of  Commerce;  operated  by  a  manager  and  efficient  staff,  fur- 
nishes reports  on  trade  conditions,  trade  lists  and  trade  opportunities, 
expert  service  in  documentation,  shipping  information,  tariff  and  customs 
information,  arranging  and  systematizing  of  export  departments.  It 
wisely  refrains  from  giving  credit  information.  Maintains  a  thoroughly 
well  equipped  translation  bureau.  Has  honorary  correspondents  abroad. 
Co-operates  with  the  Bureau  of  Foreign  and  Domestic  Commerce.  Oper- 
ates a  Bureau  of  Education  for  foreign  trade,  which  has  worked  out  a 
full  curriculum  for  night  schools  and  day  schools,  the  Cincinnati  Univer- 
sity and  the  Ohio  Mechanics  Institute.  Issues  a  foreign  trade  bulletin. 
Makes  a  specialty  of  inviting  and  entertaining  foreign  buyers.  Does 
not  believe  in  organized  trips  of  members,  but  assists  members  and  their 
representatives  going  abroad,  by  furnishing  letters  of  introduction, 
itineraries,  etc. 

Rochester. — Maintains  a  Foreign  Trade  Department  without  special 
membership  fee.  It  is  under  the  supervision  and  direction  of  a  Foreign 
Trade  Committee.  It  endeavors  to  give  information  and  advice  on  all 
matters  relating  to  foreign  trade.  Furnishes  no  credit  reports  or  trans- 
lations and  has  no  foreign  correspondents.  Considering  co-operation 
with  the  Bureau  of  Foreign  and  Domestic  Commerce.  Holds  series  of 
meetings  with  addresses  by  experts  for  the  benefit  of  its  members  and 
their  employees.  Invites  the  government's  trade  commissioners  returning 
from  abroad  to  address  the  committee. 

San  Francisco. — This  organization  maintains  a  very  strong  foreign 
trade  committee.  The  report  of  this  committee  quoted  below  in  extract 
is  an  indication  of  what  a  local  chamber  of  commerce  may  accomplish 
in  foreign  trade  promotion: 

During  the  year  the  Foreign  Trade  Department  published  twenty- 
five  hundred  foreign  trade  opportunities,  an  average  of  over  eight  per 
working  day.  There  are  an  average  of  over  three  hundred  requests  a 
week  for  these  data.  The  seventh  National  Foreign  Trade  Convention 
was  secured  for  San  Francisco  for  May  1920.  This  will  bring  some  two 
thousand  of  the  leading  business  men  of  the  country  here:  Special 
steamships  have  been  arranged  for,  one  to  leave  Calcutta  and  the  other 
Valparaiso,  stopping  at  intermediate  ports  to  bring  such  American  mer- 
chants living  abroad  as  can  get  away.  Secured  the  establishment  of  a 
Commercial  Agency  of  the  Bureau  of  Commerce  and  Industry  of  the 
Philippine  Government  and  a  Commercial  Bureau  of  the  Department  of 
Commerce  of  the  Chinese  Government,  also  a  Commercial  Bureau  of  the 
Australian  Government. 

Secured  the  California  representation  of  the  American-Russian  Chamber 


520  INTERNATIONAL  COMMERCE 

of  Commerce  of  New  York  with  branches  throughout  Russia  and  Rou- 
mania.  As  soon  as  conditions  permit  this  will  be  of  immense  benefit  to 
San  Francisco  merchants.  Was  successful  in  prevailing  upon  the  Ship- 
ping Board  to  load  the  new  steel  ships  being  built  on  the  Pacific  Coast 
direct  to  Europe  with  Pacific  Coast  foodstuffs  instead  of  going  to  the 
Atlantic  for  loading.  Two  French  lines  are  practically  decided  to  open 
service,  one  to  Mediterranean  and  the  other  to  Channel  ports.  Two 
Belgian  Steamship  Lines  are  now  figuring  on  establishing  service  to  and 
from  the  Pacific  Coast.  Three  British  lines  are  now  considering  the  es- 
tablishment of  regular  service.  One  Italian  line  contemplates  establish- 
ing direct  service  to  Mediterranean  ports.  Direct  regular  service  between 
Pacific  Coast  and  Charleston  is  promised  for  late  August.  Direct  regu- 
lar service  is  promised  for  September  between  San  Francisco  and  Phila- 
delphia. Direct  fast  passenger  and  freight  service  between  San  Fran- 
cisco and  New  York  is  promised  for  late  fall. 

Prevailed  upon  the  Government  to  furnish  monthly  detailed  state- 
ments of  exports  and  imports  by  countries  and  commodities  for  the  ports 
of  Washington,  Oregon,  San  Francisco,  Southern  California  and  New 
York.  Did  considerable  work  in  connection  with  the  Traffic  Bureau  in 
trying  to  secure  low  export  and  import  rail  rates.  Secured  consent  of 
State  and  Navy  Departments  to  send  commercial  news  by  Radio  free  to 
all  the  countries  of  the  Orient  so  it  could  reach  the  people  of  those 
countries  unfiltered  or  distorted  by  foreign  influence.  Arranged  with 
over  one  hundred  and  eighty  foreign  newspapers  and  magazines  to  send 
weekly  publicity  items  which  are  now  being  largely  copied  in  such  pub- 
lications throughout  the  Far  East.  Arranged  for  close  co-operation  and 
assistance  with  the  various  American  Chambers  of  Commerce  located  in 
foreign  countries  among  which  are  the  American  Chambers  of  Commerce 
at  London,  Paris,  Shanghai,  Tientsin.  Amsterdam,  Naples,  Barcelona, 
Saloniki,  Mexico  City,  Buenos  Aires,  Rio  Janeiro,  Cape  Town,  Manila, 
Barranquilla,  Milan. 

Sends  each  week  copy  of  the  "Activities"  to  every  Consul  and  Cham- 
ber of  Commerce  located  at  ports  of  the  Pacific  Ocean.  Has  on  file  some 
ten  thousand  books,  pamphlets,  reports,  etc.,  and  receives  regularly  some 
three  hundred  publications  a  month  including  British  American  and  Far 
Eastern. 

Buffalo. — This  chamber  of  commerce  maintains  a  foreign  trade  de- 
partment without  fees  to  members,  under  the  direction  of  a  committee 
of  five  to  seven  members,  employing  an  export  trade  secretary.  It  gives 
out  foreign  trade  opportunities,  keeps  a  list  of  competent  translators. 
It  is  practically  a  co-operative  office  of  the  Bureau  of  Foreign  and  Do- 
mestic Commerce. 

The  export  trade  bureau  is  active  and  has  been  in  existence  four 
years.  It  has  been  instrumental  in  increasing  the  local  interest  in  for- 
eign trade.  It  publishes  its  news  in  the  chamber  of  commerce  bulletin 
known  as  the  "Buffalo  Live  Wire."  It  has  urged  its  members  to  attend 
National  Foreign   Trade  Conventions. 

Pittsburgh  Chamber  of  Commerce.— The  Foreign  Trade  Department 
has  just  been  organized.  It  is  a  co-operative  office  of  the  Bureau  of 
Foreign  and  Domestic  Commerce.  It  will  seek  to  place  before  members 
inquiries  from  all  over  the  world  which  are  addressed  to  the  chamber 
of  commerce.  Frequently  the  Chamber  has  been  able  to  pass  on  inqui- 
ries for  products   not   manufactured   in   Pittsburgh   to   manufacturers   in 


LOCAL  ORGANIZATIONS  521 

other  cities.     The  Foreign  Trade  Department  is  working  out  plans  for 
educative  and  other  activities. 

Seattle.— Services  of  the  Foreign  Trade  Bureau  are  free  to  the  mem- 
bers of  the  Chamber  of  Commerce.  The  Bureau  is  managed  by  a  direc- 
tor and  supervised  by  an  executive  committee.  Maintains  a  reference 
library,  compiles  statistics,  entertains  foreign  visitors.  Keeps  in  touch 
with  competent  translators.  Publishes  a  section  for  foreign  trade  news 
in  the  "Seattle  Spirit,"  bulletin  of  the  Chamber  of  Commerce.  Has  or- 
ganized trips  of  members  to  foreign  countries. 

Merchants'  Association  of  New  York.— This  great  association  organ- 
ized its  Foreign  Trade  Department  only  a  few  years  ago.  The  venturo 
long  ago  passed  the  experimental  stage  and  is  a  pronounced  success.  The 
Merchants'  Association  receives  many  thousands  of  inquiries  for  Amer- 
ican products  and  during  the  years  1918-1919,  1700  visitors  called  at  the 
office,  including  many  foreigners.  About  one  tenth  of  inquiries  received 
come  from  foreign  consuls  chiefly  in  New  York  City.  The  Foreign  Trade 
Department  is  under  expert  management.  An  extract  from  its  last  an- 
nual report  may  be  of  interest: 

From  its  inception  the  Bureau  has  assisted  houses  entering  foreign 
trade  and  those  enlarging  or  changing  their  foreign  business.  In  the 
last  quarter  of  the  year,  however,  due  to  restrictions  this  work  fell  to 
about  one-third  its  former  importance.  During  the  twelve  months  it 
had  226  separate  requests  for  assistance  in  these  directions.  These  re- 
quests came  from  houses  wishing  to  develop  business  in  fields  which 
they  had  not  hitherto  cultivated. 

The  most  direct  aid  which  the  Bureau  affords  New  York  firms  is  the 
distribution  of  opportunities  for  foreign  business  dealings.  Represen- 
tatives of  foreign  houses  frequently  learn  of  the  Merchants'  Association 
of  New  York  before  leaving  their  native  country,  and,  upon  arrival, 
come  to  its  headquarters  at  once  for  guidance  in  getting  in  touch  with 
the  most  desirable  houses  regarding  the  purchase  or  sale  of  merchandise. 
Letters  and  cable  messages  asking  its  assistance  in  similar  matters  are 
daily  received. 

During  the  war,  in  order  to  keep  the  trade  opportunity  work  before 
other  houses,  the  Bureau  sent  approximately  six  hundred  copies  of  its 
annual  Year  Book  to  American  Consuls  aborad.  The  Bureau  prepared 
five  articles  which  either  described  the  foreign  trade  work  of  the  As- 
sociation or  related  to  some  problem  or  phase  of  oversea  business,  which 
were  published  in  papers  in  the  United  States  or  abroad. 

Illinois  Manufacturers  Association. — This  organization  has  been  de- 
voting a  great  deal  of  attention  to  foreign  trade  interests  of  its  mem- 
bership. It  maintains  an  unsually  strong  foreign  trade  committee  which 
has  been  in  attendance  at  all  the  recent  prominent  conventions  discuss- 
ing foreign  trade.  It  is  considering  the  establishment  of  a  Foreign  Trade 
Bureau. 

The  Chicago  Association  of  Commerce. — The  Chicago  Association  of 
Commerce  is  one  of  the  most  successful  and  progressive  organizations 
of  local  character  having  for  their  aim  the  advancement  of  the  foreign 
trade  interests  of  the  business  community  within  their  sphere  of  activi- 
ties. It  offers  to  its  members  interested  in  the  sale  of  their  goods  abroad 
all  information  regarding  the  financing  of  the  shipment,  proper  packing, 


522  INTERNATIONAL  COMMERCE 

etc.,  obtains  inland  and  ocean  freight  rates,  insures  shipments  and  books 
space.  It  gives  information  on  the  customs  tariffs  of  foreign  countries, 
statistics,  etc.  It  maintains  cordial  relations  with  chambers  of  commerce 
and  like  organizations  in  all  foreign  countries,  supplying  them  with 
copies  of  its  classified  membership  directory  and  other  literature,  invit- 
ing them  to  give  letters  of  introduction  to  merchants  about  to  visit 
Chicago  and  introduces  foreign  visitors  to  concerns  in  the  city.  Its  direc- 
tory and  other  publications  are  models  of  their  kind.  The  Chicago  Asso- 
ciation of  Commerce  is  one  of  the  American  local  organizations  most 
widely  known  in  foreign  countries.  Copies  of  its  Blue  Book  may  be  seen 
in  every  country  in  the  world. 

Foreign  Trade  Club,  San  Francisco. — This  is  an  organization  of  sev- 
ral  hundred  firms  and  individuals  in  San  Francisco,  meeting  once  a  week 
to  hear  lectures  by  experts  on  foreign  trade  topics.  It  has  been  described 
as  one  of  the  livest  organizations  of  its  kind  in  America.  Its  lectures 
are  printed  in  the  shape  of  handy  pamphlets  and  form  a  valuable  re- 
ference library  for  its  members. 


CHAPTER  XX. 

Export  Publicity  Methods. 

a)    General  Remarks. 

The  object  of  publicity  is  to  bring  something  to  the  knowl- 
edge of  the  public  quickly,  economically,  efficiently.  In  no  coun- 
try in  the  world  has  there  been  so  much  striking  and  successful 
exploitation  of  publicity  as  in  the  United  States.  Almost  all 
European  languages  use  the  same  word,  with  slight  lingual 
changes,  to  denote  publicity  :  Reclame,  Reklame,  Reclama.  And 
it  is  a  significant  fact  that  it  is  almost  invariably  coupled  with 
the  qualifying  word  "American."  The  elaboration  of  die  cata- 
log; the  apotheosis  of  the  electric  illuminated  sign;  the  weekly 
journal  with  its  wealth  of  page  advertisements;  the  daily  news- 
paper with  its  tremendous  circle  of  readers ;  the  recourse  to  ad- 
vertising by  the  government  and  even  by  churches — all  these 
things  prove  that  America  is  the  classical  land  of  publicity. 

Publicity,  through  its  remarkable  development  and  speciali- 
zation, has  made  its  necessary  for  all  commercial  enterprises  de- 
pending upon  the  sale  of  their  products  to  place  that  phase  of 
the  selling  organization  in  the  care  of  competent  and  specially 
trained  men.  And  co-operating  with  them  are  the  numerous  or- 
ganizations of  experts  operating  advertising  agencies  or  adver- 
tising service  bureaus.  The  best  methods  of  advertising  a  given 
product  among  a  given  public  in  a  given  territory  are  carefully 
worked  out,  painstakingly  executed  and  followed  up.  The  re- 
sults are  checked  up.     The  weak  spots  are  bolstered  up. 

For  some  reason  or  other  publicity  abroad  is  not,  as  a  rule, 
sought  along  the  lines  of  the  same  co-ordination  of  study  of  the 
market,  of  available  methods  of  publicity  and  of  the  best  manner 
of  bringing  the  product  concerned  to  the  knowledge  of  the  people 
concerned  in  such  a  way  as  to  induce  them  to  buy  it. 

In  seeking  publicity  abroad  the  first  principle  is  to  be  very 


524  INTERNATIONAL  COMMERCE 

clear  whether  the  product  that  is  to  be  advertised  is  suited  for  a 
given  market.  If  it  is  not  suited  for  it,  if  a  demand  for  it  can- 
not be  reasonably  expected  to  be  developed,  if  it  cannot  be 
adapted  for  it,  it  would  be  a  waste  of  time  to  advertise  it. 

Having  by  a  process  of  elimination  arrived  at  those  mar- 
kets where  a  given  product  may  be  sold,  it  will  be  necessary  to 
study  each  market  separately. 

It  will  be  found  that  the  media  of  publicity  available  in  each 
country  differ.  In  England  and  France  and  Germany,  in  some 
of  the  very  large  cities  throughout  the  world  there  are  almost 
the  same  methods  used  as  in  America,  though  on  a  smaller  scale. 
Everywhere  else  there  will  be  found  a  remarkable  scarcity  of 
publicity  media  compared  with  those  in  use  in  America. 

The  psychology  of  each  market  differs.  Outside  of  a  few 
elemental  instances,  an  appeal  must  be  presented  differently  in 
each  country,  and  even  to  various  strata  of  population  in  the 
same  country. 

The  exporter  and  manufacturer  must  also  be  very  clear  to 
whom  he  wishes  to  sell  his  product :  to  the  trade?  if  so,  to  whole- 
salers or  retailers?  to  natives  or  foreigners  in  the  marker  under 
consideration?  To  consumers?  if  so,  to  wealthy  or  poor  classes? 
To  educated  or  uneducated  consumers?  He  must  familiarize 
himself  with  the  degree  of  purchasing  power  in  each  class  of  the 
population  which  he  may  seek  to  reach.  A  breakfast  food  manu- 
facturer had  his  circular  translated  into  the  language  of  a  cer- 
tain race  in  the  Far  East  that  is  so  notoriously  poor  that  it 
would  have  to  pay  an  equivalent  of  one  and  a  half  day's  wages 
for  a  package  of  this  breakfast  food,  and  special  technical  terms 
had  to  be  coined  to  convey  an  idea  as  to  the  protein  contents  of 
the  food  to  people  who  were  almost  altogether  illiterate,  and  to 
whom  a  chemical  analysis  was  an  unsolvable  mystery. 

The  exporter  and  manufacturer  will  find  it  necessary  to  seek 
expert  advice  before  planning  a  publicity  campaign,  abroad.  The 
export  manager  and  the  advertising  manager  must  get  together, 
and  if  between  them  they  do  not  know  how  to  utilize  the  avail- 
able publicity  methods  for  a  given  market,  they  must  seek  the 
co-operation  of  advertising  specialists  who  have  studied  the  for- 
eign field.  This  does  not  mean  that  they  should  seek  out  an  ad- 
vertising agency  that  merely  has  in  its  possession  a  list  of  rates 


PUBLICITY  ABROAD  525 

for  advertising  in  foreign  newspapers.  If  an  advertising  agency 
has  no  specialists  in  its  employ  who  have  made  a  thorough  study 
of  the  best  methods  for  bringing  various  American  products  to 
the  knowledge  of  those  who  buy  them  in  this  or  that  market, 
the  exporter  will  do  well  to  shun  such  an  agency. 

Foreign  publicity  must  be  made  a  special  department  of 
prominent  advertising  agencies.  Men  must  be  specially  trained 
for  this  work.  Actual  selling  experience,  foreign  travel  and  close 
touch  with  conditions  in  each  country  are  the  prerequisites  for 
efficient  service  in  this  connection. 

But  directing  publicity  abroad  at  long  range  must  neces- 
sarily lead  to  some  disappointments.  It  takes  a  wise  and  well- 
informed  man  to  satisfactorily  direct  a  publicity  campaign  in 
New  Zealand  from  Chicago.  The  exporter  and  manufacturer 
must  content  himself  with  such  means  if  he  has  no  competent 
branch  manager,  agent  or  representative  in  a  foreign  country. 
If  he  has  such  a  one,  the  wisest  plan  is  to  place  him  in  charge 
of  local  publicity. 

The  Bureau  of  Foreign  and  Domestic  Commerce  receives 
from  time  to  time  valuable  information  from  consuls  and  from 
trade  commissioners  on  the  subject  of  advertising  abroad.  Not 
long  ago  it  issued  a  booklet  giving  the  rates  of  advertising  in 
many  foreign  newspapers.  This  book  is  now  out  of  print.  It 
may  be  added,  fortunately.  The  possession  of  a  book  with  ad- 
vertising rates  in  foreign  newspapers,  without  the  knowledge  of 
how  to  use  them  or  not  to  use  them,  is  like  letting  children  play 
with  explosives. 

If  in  seeking  foreign  publicity  the  object  is  to  attract  to  the 
export  department  inquiries  and  orders  for  goods,  and  the  manu- 
facturer in  question  has  no  branches  or  agencies  abroad,  he  has 
at  his  disposal  the  American  export  journals,  which  we  will  dis- 
cuss below,  circularization  of  business  houses  whose  names  he 
can  secure  from  the  Bureau  of  Foreign  and  Domestic  Commerce, 
from  the  export  journals  which  he  may  use  for  advertising, 
from  organizations,  such  as  the  National  Association  of  Manu- 
facturers, American  Manufacturers'  Export  Association,  Phila- 
delphia Commercial  Museum,  etc.  If  his  products  appeal  to  cer- 
tain trades,  he  may  advertise  in  the  trade  journals  of  England, 


526  INTERNATIONAL  COMMERCE 

France,  Germany,  Italy,  or  in  papers  such  as  are  read  by  the 
entire  trade  of  a  country,  as  "Capital,"  in  India. 

He  will  prepare  special  matter  for  such  media,  being  par- 
ticular to  remember  that  what  is  generally  known  about  his  pro- 
duct in  America  may  not  be  known  abroad.  He  must  be  clear ; 
he  must  use  the  language  of  the  country  in  which  the  goods  are 
advertised,  and  in  using  the  language  of  the  country  he  must  be 
sure  that  it  is  the  right  kind  of  language.  Even  in  the  use  of 
English  there  are  vast  differences.  The  baseball  column  of  an 
American  newspaper  is  a  puzzle  to  an  Englishman  or  an  Aus- 
tralian. Expressions  used  in  Mexico  are  not  always  understood 
in  Peru  or  Colombia. 

Such  advertising  being  long-range  advertising,  the  pros- 
pective buyer  must  find  in  it  full  information  as  to  where  to  send 
his  money  and  how  much  to  send,  or  at  least  how  to  write  the 
advertiser. 

In  many  countries  he  will  find  a  dearth  of  special  trade 
papers,  and  those  that  exist  may  have  a  limited  subscription  list. 
But  it  is  unwise  to  assume  that  such  trade  papers  are  entirely 
lacking.  Progress  is  being  constantly  made  in  this  direction. 
.Some  excellent  trade  papers,  for  instance,  have  been  founded  in 
Buenos  Ayres  and  other  Latin-American  cities  in  recent  years. 

If  the  product  is  intended  for  the  masses,  it  is  unwise  to 
start  a  publicity  campaign  in  any  country  without  the  co-opera- 
tion of  a  sales  agency  in  that  country.  For  the  publicity  depart- 
ment might  devise  methods  that  are  utterly  unsuited  to  the  coun- 
try. Publicity  intended  for  the  masses  should  be  only  used  in 
conjunction  with  locally  directed  distribution,  and  it  is  only  wise 
to  entrust  such  publicity  campaigns  to  the  local  distributors,  or 
at  least  to  be  guided  by  their  advice. 

Electric  illuminated  signs  are  now  in  use  in  many  countries, 
and  ?.re  always  effective  wherever  they  are  used  merely  to  bring 
to  the  attention  of  the  throngs  articles  of  interest  to  them  that 
can  be  bought  locally. 

One  of  the  most  effective  means  of  advertising,  a  medium 
which  is  yet  in  its  infancy,  is  the  film.  All  people,  particularly 
the  Orientals,  like  to  see  how  a  thing  is  done.  A  number  of 
American  manufacturers  have  exhibited  films  demonstrating  the 


AMERICAN  EXPORT  JOURNALS  527 

making  and  the  use  of  an  American  product  to  Chinese  and 
Japanese  audiences. 

To  summarize,  each  product,  each  foreign  country,  each 
class  of  buyers  abroad  presents  a  separate  problem.  Each  of 
these  problems  demands  a  special  study  and  a  special  solution 
Publicity  must  go  hand  in  hand  with  the  means  of  distribution. 
If  purchasing  eagerness  is  awakened,  the  prospective  buyer  must 
be  able  to  get  the  article  wanted  before  his  zeal  subsides  and 
without  going  to  a  great  deal  of  trouble.  Publicity  must  take 
into  consideration  the  nature  of  the  information  which  the  for- 
eigner should  receive  concerning  the  product  advertised.  His 
psychology  must  be  considered.  Most  nations  object  to  our  frivo- 
lous use  of  superlatives.  Instead  of  characterizing  anything  as 
the  biggest  or  finest  or  fastest,  it  is  best  to  state  that  an  article 
possesses  certain  unusual  merits,  and  then  to  recite  each  of  these 
special  merits. 

In  the  following  we  will  consider  the  proper  use  of  the  vari- 
ous media  available  to  the  American  manufacturer  in  search  of 
publicity  abroad  for  his  products. 

b)    Publicity  Through  American  Export  Periodicals. 

Like  the  American  export  commission  merchant,  the  reput- 
able American  export  journal  has  done  much  to  upbuild  Amer- 
ican trade  with  foreign  countries.  American  exporters  and 
manufacturers  owe  a  distinct  debt  to  the  activity  of  the  foremost 
American  export  journals.  The  foundation  of  many  a  flourish- 
ing export  department  rests  upon  the  first  aid  rendered  it  by 
these  periodicals. 

There  have  been  numerous  American  export  periodicals 
launched  upon  the  troubled  sea  of  international  commerce,  but 
only  a  few  have  survived.  These  few  illustrate  the  survival 
of  the  fittest.  They  have  survived  and  prospered  because  they 
give  actual  service,  and  because  the  results  of  publicity  attained 
through  them  justify  the  continued  confidence  of  the  exporters 
and  manufacturers. 

Not  so  many  years  ago  it  was  difficult  for  concerns  abroad, 
even  if  interested  in  American  products,  to  come  in  contact  with 
sources  of  supply  in  the  United  States.     The  export  journal, 


528  INTEENATIONAL  COMMEECE 

first  printed  in  English,  then  in  Spanish,  and  finally  also  in 
Portuguese  and  French,  came  to  the  hands  of  foreign  merchants 
at  first  unsolicited.  Its  reading  matter,  in  the  beginning,  was 
of  little  interest.  Its  advertising  pages  were  of  great  interest. 
Inquiries  were  sent,  answers  were  received,  connections  were 
opened. 

Little  by  little  the  list  of  those  who  received  these  journals 
increased.  The  literary  contents  of  the  publications  improved  in 
quality.  Here  and  there  the  merchant  was  willing  to  pay  a  sub- 
scription so  as  to  be  sure  to  get  the  magazine  regularly.  Unre- 
liable or  improperly  financed  publications  started  with  much 
noise  and  sent  out  solicitors  to  foreign  countries,  and  received 
subscriptions,  chiefly  clue  to  the  hopes  of  the  subscribers  that 
they  would  prove  at  least  equal  to  the  old  publications  which 
they  had  been  receiving  unsolicited.  These  mushroom  ventures 
collapsed  generally  after  a  brief  existence. 

The  export  periodicals  of  to-day  are  in  many  instances 
gorgeously  gotten  up  affairs,  but  their  appearance  is  not  the 
thing  that  makes  them  valued  abroad.  It  is  the  fact  that  each 
of  them  is  a  sort  of  a  classified  directory  of  American  products 
in  the  language  of  the  country.  Beyond  a  doubt  the  frequently 
clever  and  certainly  wonderfully  well  illustrated  articles  ap- 
pearing in  them  are  only  of  secondary  consideration.  It  is  dif- 
ficult for  an  American,  no  matter  how  clever  he  is,  to  write  an 
article  that  would  interest  a  Colombian  or  a  Moroccan.  The  ex- 
port periodical  printed  in  America  can  never  become  to  the  for- 
eigner what  the  Saturday  Evening  Post  is  to  an  American,  but 
it  will  be  valued  chiefly  because  of  its  advertising. 

Export  periodicals  almost  invariably  give  services  of  vari- 
ous kinds  to  their  subscribers.  While  this  originated  doubtless 
in  the  desire  of  being  relpful  to  advertisers,  on  the  basis  of  its 
circulation  (whether  paid  or  not,  matters  very  little,  because  the 
export  periodical  is  not  read  for  literary  purposes,  as  an  ordinary 
reader  who  buys  the  Century  or  Harper's  Magazine  reads  such 
magazines,  but  for  the  advertising  which  interests  foreign  mer- 
chants). Frequently  the  American  manufacturer  has  established 
his  own  branches  abroad  and  is  less  dependent  upon  the  expert 
publication,  but  for  patriotic  reasons,  and  for  the  sake  of  gen- 
eral publicity,  he  will  maintain  his  advertisement  in  the  export 


AMERICAN  EXPORT  JOURNALS  529 

journal.  American  export  periodicals  have  done  pioneer  work 
in  securing  publicity  for  American  manufacturers  where  it  counts 
in  dollars  and  cents. 

The  principal  American  export  journals  are  mentioned  in 
the  following  lines: 

i.  AMERICAN  EXPORTER  is  published  in  four  edi- 
tions, English,  Spanish,  French,  Portuguese,  every  month.  The 
advertising  is  grouped  according  to  the  nature  of  the  product  in 
15  divisions.  The  American  Exporter  furnishes  a  weekly  bul- 
letin of  Foreign  Trade  Opportunities.  It  maintains  a  large  and 
well  equipped  service  bureau.  Representatives  of  the  American 
Exporter  undertake  foreign  trade  tours  in  the  interest  of  its 
advertisers.  The  American  Exporter  has  been  in  existence  42 
years.  Its  editor  is  B.  Olney  Hough,  author  of  "Practical  Ex- 
porting," and  a  recognized  expert  in  matters  of  international 
commerce.  The  distribution  of  the  American  Exporter  is  given 
as  17,000  copies  of  the  English  edition,  19,000  of  the  Spanish 
edition,  11,000  of  the  French  edition,  and  7,000  of  the  Portu- 
guese edition. 

2.  EXPORT  AMERICAN  INDUSTRIES,  the  official  in- 
ternational organ  of  the  National  Association  of  Manufacturers, 
is  an  admirably  gotten  up  publication  in  English,  French,  Spanish 
and  Portuguese.  Export  American  Industries  publishes  a  sworn 
statement  of  circulation.  The  total  for  the  French,  Spanish  and 
English  edition  for  June  1919,  was  52,602,  of  which  about  half 
went  to  Latin  America.  The  literary  contents  of  these  magazines 
are  of  a  very  high  order,  aiming  to  bring  America  before  the 
foreign  reader.  It  is  claimed  that  Export  American  Industries 
publishes  no  write-ups,  which  is  a  commendable  policy,  because 
write-ups  by  their  generally  forced  construction  defeat  their  very 
object  and  may  lessen  the  reader's  interest,  if  not  confidence. 
The  Foreign  Trade  Service  of  Export  American  Industries  is 
of  the  high  grade  possible  to  a  publication  allied  with  the  Na- 
tional Association  of  Manufacturers. 

3.  DUN'S  INTERNATIONAL  REVIEW,  published  in 
Spanish,  Portuguese  and  English,  is  affiliated  with  the  well- 
known  mercantile  agency.  The  facilities  of  this  organization 
with  its  sixty-eight  branches  in  foreign  countries  to  direct  the 


530  INTERNATIONAL  COMMERCE 

circulation  of  these  periodicals  into  channels  where  each  copy 
counts  are  obvious.  A  most  valuable  adjunct  of  Dun's  Indus- 
trial Review  is  the  "World's  Markets,"  a  publication  containing 
much  information  of  great  value  to  American  manufacturers 
and  exporters.  Dun's  International  Review  claims  a  circulation 
of  over  30,000  in  Europe. 

4.  EL  COMERCIO,  is  an  old  established  export  monthly 
circulating  in  Spanish  speaking  countries. 

5.  EXPORTER'S  REVIEW  is  a  publication  intended  prin- 
cipally for  exporters  of  American  products.  It  is  published  by 
the  Exporters  Encyclopedia  Co.,  under  whose  auspices  appears 
that  important  handbook  for  exporters  which  should  not  be  mis- 
sing from  any  export  department.  Exporters'  Review  has  also 
an  important  circulation  among  importers  in  foreign  countries. 

6.  EXPORT  TRADE  is  a  new  and  very  live  little  publica- 
tion serving  the  interests  of  American  exporters  and  containing 
much  valuable  information.  It  has  survived  the  critical  period 
and  bodes  well  to  become  a  most  valuable  magazine. 

c)    Catalogs  and  Circularization. 

A  great  deal  of  what  has  been  said  with  regard  to  advertis- 
ing abroad  in  general  applies  also  to  that  form  of  publicity  which 
is  known  as  the  catalog. 

A  catalog  is  a  booklet  intended  to  acquaint  its  reader  with 
the  general  line  of  products  manufactured  or  sold  by  a  firm.  It 
should  be  informative  in  a  concise  way.  The  information  con- 
tained therein  has  the  aim  of  inducing  the  reader  to  buy.  It  re- 
places the  salesman  to  some  extent.  In  inducing  the  reader  to 
buy  it  must  furnish  him  with  all  the  data  necessary  to  come  to 
such  a  decision,  without  leaving  him  half-way  in  his  desire,  for 
if  the  buyer  cannot  tell  what  the  goods  will  cost  him,  he  may 
postpone  the  placing  of  an  order,  and  someone  else  may  present 
a  competing  line  with  such  wealth  of  data  and  of  selling  argu- 
ments that  the  object  of  sending  the  catalog  will  be  defeated.  The 
catalog  must  be  furnished  with  prices  showing  the  cost  of  the 
article  at  destination.     But  since  the  catalog  for  the  trade  may 


THE  CATALOG  531 

have  to  be  shown  the  recipient's  customer,  these  prices  should 
be  in  a  supplement  and  not  in  the  body  of  the  catalog. 

The  catalog  must  be  in  the  language  which  the  recipient  can 
readily  understand.  Therefore  the  English  catalog  will  be  of 
no  use  to  a  recipient  who  cannot  read  English.  We  have  then 
the  necessity  of  translating  the  catalog  into  the  language  of  the 
country  to  which  it  is  to  be  sent.  Care  in  translation  is  some- 
thing so  obvious  that  it  would  be  a  waste  of  time  to  dwell  on 
it.  Only  experienced  translators,  thoroughly  conversant  with 
the  technique  of  the  line  and  with  the  technical  side  of  trans- 
lating and  with  the  current  use  of  the  language  in  the  country 
for  which  it  is  destined  should  be  entrusted  with  the  work.  The 
manufacturer  will  do  well  to  consult  the  translation  bureau  of 
organizations  that  are  responsible  and  have  experience  in  trans- 
lating catalogs. 

Mere  translating  is  inadequate.  The  English  catalog  con- 
tains selling  arguments  that  lose  in  force  when  translated  into 
a  foreign  language.  They  are  intended  for  readers  more  or  less 
familiar  with  the  product,  whereas  foreign  readers  may  not  be. 
They  are  intended  to  meet  a  different  competition  from  the  kind 
that  will  be  encountered  abroad. 

The  catalog  for  foreign  consumption  must  be  specially  edited 
for  each  country  and  for  each  set  of  readers.  The  catalog  for 
foreign  use  is  intended  as  a  reference  work.  It  must  be  calcu- 
lated for  frequent  and  prolonged  use.  It  must  be  made  so  valu- 
able and  interesting  that  it  will  not  wander  into  a  waste  basket. 
Catalogs  should  be  sent  to  all  American  consulates  abroad  and 
to  selected  lists  of  buyers.  These  lists  of  buyers  may  be  ob- 
tained from  the  Bureau  of  Foreign  and  Domestic  Commerce, 
from  organizations  as  the  National  Association  of  Manufac- 
turers, Manufacturers'  Export  Association,  etc.,  or  from  export 
periodicals.  In  selecting  lists  from  foreign  directories  great  care 
must  be  exercised. 

Applicants  for  catalogs  should  be  scrutinized.  There  are 
very  many  irresponsible  persons  abroad  who  write  for  catalogs. 
The  sending  of  a  catalog  should  be  followed  up  from  time  to 
time  by  courteous  letters  in  the  language  of  the  country.  Travel- 
ing salesmen  going  abroad,  agents  in  foreign  countries,  foreign 


532  INTERNATIONAL  COMMERCE 

branches  should  immediately  be  notified  of  requests  for  cata- 
logs. 

It  is  well  to  send  catalogs  in  a  bunch  to  the  manufacturer's 
agent  or  foreign  branch  in  each  country  where  he  maintains  such 
connections.  In  some  countries  duties  are  imposed  upon  for- 
eign catalogs.  In  that  case  arrangements  should  be  made  to  send 
catalogs  in  bulk  to  an  address  in  the  country  concerned,  to  pay 
the  duty  and  to  have  the  catalogs  mailed  from  that  address. 

d)    Publicity  Through  Foreign  Newspapers  and  Trade 
Journals. 

EUROPE. 

AUSTRIA. — The  principal  newspapers  appear  in  Vienna.  Viennese 
newspapers  are  read  throughout  the  German  speaking  portions  of  Aus- 
tria. An  advertising  agency  in  Vienna  should  be  consulted.  Products 
for  mass  consumption  may  be  properly  advertised  in  those  newspapers, 
provided  there  is  a  possibility  of  the  consumer  purchasing  the  product 
from  an  Austrian  source.  Publicity  in  these  newspapers  may  also  be 
sought  at  supplementing  the  efforts  of  agents  in  Austria.  There  are  a 
number  of  trade  papers  published  in  Austria.  Their  circulation  is  not 
as  a  rule  great,  except  in  the  dry  goods  line.  For  other  trades  circular- 
ization  is  better  suitable  than  advertising  in  trade  papers,  particularly 
as  the  latter  aim  to  foster  the  interests  of  the  home  industries. 

BELGIUM. — The  Belgians  are  great  newspaper  readers.  The  per- 
centage of  literacy  is  very  high.  Articles  for  general  consumption  may 
be  properly  advertised  in  Belgian  newspapers  through  the  medium  of  an 
advertising  agency  in  Brussels.  Belgium  is  a  small  and  compact  coun- 
try. Lists  of  tradesmen  in  various  lines  may  be  obtained  readily,  though 
a  few  months  should  be  permitted  to  elapse  for  the  compilation  of  new 
lists,  as  various  trades  pass  again  into  a  normal  stage.  Many  excellent 
trade  papers  are  published  in  Belgium. 

BULGARIA. — The  Bulgarian  commercial  community  is  not  very 
lorge.  The  mass  of  Bulgarian  people  are  peasants  and  not  great  news- 
paper readers.  The  trade  can  best  be  reached  by  circularization.  The 
American  Chamber  of  Commerce  for  the  Levant  may  be  profitably  con- 
sulted. 

CZECHO-SLOVAKIA. — A  publicity  campaign  should  be  launched 
from  Prague.  The  appointment  of  an  agent  in  Prague  and  the  manage- 
ment of  publicity  through  him  are  advised. 

DENMARK.-^This  is  a  small  country  and  Copenhagen  is  the  chief 
center  of  publicity.  Danish  advertising  agencies  and  Danish  represen- 
tatives  should   be    entrusted   with   advertising   arrangements. 


FOREIGN  ADVERTISING  533 

FINLAND. — This  new  republic  is  passing  through  experiments  in 
trade  co-operation  and  state  socialism.  Publicity  should  not  be  at- 
t  mpted  for  some  time  to  come.  The  situation  will  clear  before  many 
months.  Personal  visits  and  the  appointment  of  representatives  will 
lead  to  the  adoption  of  such  methods  of  publicity  as  may  become  avail- 
able.    Someone  in  Helsingfors  should  be  put  in  charge. 

FRANCE. — The  great  newspapers  of  Paris  are  read  throughout  the 
country.  There  are  also  excellent  trade  journals  of  every  description. 
Advertising  agencies  in  France  and  the  American  Chamber  of  Commerce 
iii  Paris  should  be  consulted  in  planning  publicity  campaigns. 

ITALY. — Publicity  in  Italy  should  not  be  attempted  without  the 
services  of  an  Italian  advertising  agency.  The  Italian  Chamber  of  Com- 
merce in  New  York  and  the  American  Chamber  of  Commerce  in  Milan 
may  be  profitably  consulted.  Milan,  Turin,  Genoa,  Rome  and  Naples  are 
the  chief  centers  from  which  the  publicity  campaigns  should  be  launched. 

GREAT  BRITAIN. — Publicity  methods  are  not  very  dissimilar  from 
those  in  vogue  in  America.  There  are  excellent  trade  papers  for  every 
class  of  trade.    Advertising  agencies  in  London  should  be  consulted. 

JUGO-SLAVIA. — This  new  country,  a  conglomerate  of  old  Serbia  and 
of  certain  portions  of  Austria-Hungary,  is  composed  of  units  that  have 
not  yet  attained  proper  cohesion.  It  is  not  ripe  for  publicity  campaigns. 
The  newspapers  are  not  prominent.  The  mass  of  the  population  is  not 
very  literate.     Trade  papers  are  few  and  weak. 

NETHERLANDS.— All  methods  of  advertising  current  in  the  United 
States  are  also  in  vogue  in  the  Netherlands.  A  reputable  Dutch  adver- 
tising agency  should  be  entrusted  with  planning  and  executing  a  publi- 
city campaign. 

NORWAY. — Advertising  in  Norway  should  be  handled  by  an  adver- 
tising agency  in  Christiania.  Trade  papers  are  comparatively  few  and 
unimportant.     Newspaper  advertising  is  popular. 

POLAND. — Conditions  in  the  new  republic  are  as  yet  unsettled.  Ad- 
vertising in  the  newspapers  of  Warsaw  may  bring  good  results.  There 
are  few  trade  papers.  The  masses  are  not  very  literate.  Long  range 
publicity  is  not  indicated  for  some  months  to  come.  Agents  in  Poland 
should  be  entrusted  with  publicity. 

PORTUGAL. — The  best  method  of  publicity  is  through  circularization 
of  firms  in  Lisbon  and  Oporto.  To  reach  the  consumer,  advertisements 
in  the  newspapers  of  Lisbon  and  Oporto  may  be  effective  if  backed  up 
by  a  live  agency.  American  export  periodicals  are  paying  much  atten- 
tion to  this  market. 

SPAIN. — The  mass  of  Spanish  people  are  not  great  newspaper  read- 
ers excepting  in  the  large  cities.  Magazines  do  not  carry  the  wealth  of 
advertising  such  as  characterizes  American  magazines.  Publicity  should 
be  left  in  the  hands  of  an  advertising  agency  in  Madrid  or  Barcelona. 
The  American  Chamber  of  Commerce  in  Barcelona  should  be  consulted. 
Circularization  of  the  trade  is  effective. 


634  INTERNATIONAL  COMMERCE 

SWEDEN. — A  Stockholm  advertising  agency  should  be  consulted.  The 
Swedes  are  great  newspaper  readers  and  advertising  in  the  Stockholm 
newspapers  is  very  effective.  The  Swedish  American  Chamber  of  Com- 
merce in  New  York  will  give  advice  on  publicity. 

SWITZERLAND. — Basle,  Zurich,  Geneva,  Lausanne  are  centers  of 
publicity.  The  first  two  prefer  German,  the  second  two  prefer  French 
as  the  language  of  publicity.  An  advertising  agency  in  Geneva  and  an- 
other in  Zurich  should  be  entrusted  with  publicity.  Switzerland  has  a 
fine  regional  directory  with  a  great  deal  of  information  about  the  im- 
portance of  the  firms  concerned  and  the  trade  may  be  conveniently 
circularized. 


UNION  OF  SOUTH  AFRICA. 

Excellent  newspapers  in  Cape  Town,  Durban  and  Johannesburg  may 
be  used  for  publicity.  There  are  newspapers  specially  devoted  to  com- 
merce. Our  American  export  periodicals  have  a  wide  circulation  among 
firms  interested  in  American  trade. 

MOROCCO,  TUNIS,  ALGERIA,  as  well  as  various  colonies.  Publicity 
should  take  the  form  of  circularization.  Lists  of  firms  may  be  obtained 
as  indicated  elsewhere. 

EGYPT. — Newspapers  in  Cairo  and  Alexandria  may  be  used  to  ad- 
vantage, likewise  circularization. 


AUSTRALIA. 


AUSTRALIA  and  NEW  ZEALAND.— Excellent  newspapers  and  trade 
papers  can  be  advantageously  used,  but  the  co-operation  of  an  adver- 
tising agency  in  Melbourne  or  Sydney  and  in  Auckland  or  Wellington 
should  be  secured. 


ASIA. 

CHINA. — There  are  excellent  papers  in  Shanghai  and  in  Hongkong 
for  the  European  trade.  The  natives  may  best  be  reached  by  film  ex- 
hibitions. Publicity  for  the  native  trade  is  indicated  by  Chinese  news- 
papers, which  should  not  be  employed  unless  through  someone  resident 
in  the  various  portions  of  China. 

JAPAN. — The  Japanese  are  more  literate  than  the  Chinese.  A  num- 
ber of  widely  read  Japanese  newspapers  and  trade  papers  may  be  em- 
ployed through  the  co-operation  of  an  agency  in  Japan.  There  are  good 
English  newspapers  in  Tokio,  Yokohama  and  Kobe,  read  by  the  European 
and  American  business  community.  The  use  of  illuminated  signs  is  very 
common.  Circularization  (in  the  English  language)  through  carefully 
selected  lists  may  be  also  very  effective. 


FOREIGN  ADVERTISING  Gilo 

INDIA. — The  weekly  "Capital"  is  largely  read  by  the  entire  trade. 
There  are  a  number  of  native  news  and  trade  papers.  Publicity  should 
be  sought  through  the  medium  of  an  advertising  agency  in  Bombay,  Cal- 
cutta and  Madras. 

LATIN-AMERICA. 

American   export  periodicals   cover  Latin-America  efficiently. 

ARGENTINA. — There  are  excellent  newspapers  in  Buenos  Ayres. 
Advertising  should  be  entrusted  to  an  advertising  agency  specializing 
in  Argentina.  The  American  Chamber  of  Commerce  at  Buenos  Ayres 
may  be  consulted. 

BRAZIL. — There  are  excellent  modern  newspapers  in  Rio  and  Sao 
Paulo.  The  services  of  an  advertising  agency  should  be  secured.  The 
American  Chamber  of  Commerce  in  Rio  should  be  consulted. 

CHILE. — There  are  modern  newspapers  in  Valparaiso  and  Santiago. 
A  Chilean  advertising  agency  may  be  consulted,  as  well  as  the  Chamber 
of  Commerce  in  Valparaiso. 

PERU. — Lima  is  the  center  of  publicity  for  Peru.  Circularization 
and  advertising  in  Peruvian  newspapers  will  be  found  effective.  Should 
not  be  attempted  without  the  co-operation  of  someone  on  the  spot. 

For  other  Latin-American  countries  it  is  advised  to  use 
American  export  periodicals,  circularization  through  selected 
lists,  and  newspaper  advertising  only  through  the  medium  of  an 
advertising  agency  in  the  capital  of  the  country  concerned. 

Several  advertising  agencies  in  America  are  now  equipped 
to  give  advice  on  foreign  publicity.  They  should  demonstrate 
their  facilities  for  efficiently  covering  publicity  in  a  given  for- 
eign markets,  before  being  entrusted  with  a  publicity  campaign. 
The  Associated  Advertising  Clubs  of  the  World,  a  prominent 
organization  with  headquarters  in  New  York,  is  giving  a  close 
study  to  the  problem  of  foreign  trade  publicity. 


BIBLIOGRAPHY 

The  following  list  of  books  dealing  with  the  whole  domain 
or  with  special  phases  of  international  commerce  is  not  intended 
as  an  exhaustive  bibliography,  but  as  a  guide  to  reading  and 
study,  which  may  be  helpful  to  students  of  economics. 


Josef  Hellauer, 
G.  v.  Mayr, 

R.    VAN    DER   B0RGHT, 
C.    F.    FlNDEISEN, 

r.  sonndorfer, 

Alfred  Manes, 

Zehden-Sieger, 
E.  Friedrich, 

Paul  Leroy-Beaulieu, 

Leon  Say  et 
Jos.    Chailley, 

Yves  Guyot  et 
A.  Raffalovitch, 


Foreign  Works. 

System   der   Welthandelslehre,   Berlin, 
1910. 

Begriff  und  Gliederung  der  Staatswis- 
senschaften,  Tuebingen,  1901. 

Handel  und  Handelspolitik,    Berlin, 
1900. 

Grundriss     der     Handelswissenschaft, 

1875. 

Technik  des  Welthandels,  1905. 

Lehrbuch  der  Internationalen  Handels- 
kunde,  1908. 

Lehrbuch    der    Handelswissenschaft, 
1907. 

Handelsgeographie,  1906. 

Allgemeine  und  spezielle  Wirtschafts- 
geographie,   1905. 

Traite   theorique   et   pratique   l'Econo- 
mie  Politique,  Paris,   1898. 

N  o  u  v  e  a  u    Dictionnaire  d'Economie 
Politique,  Paris,  1891. 

Dictionnaire  du  Commerce,  de  l'lndus- 
trie  et  de  la  Banque,  Paris,  1901. 


538 


BIBLIOGRAPHY 

Works  in  the  English  Language. 
General  Exporting. 


B.  Olney  Hough, 

NOREERT    SAVAY, 

G.  M.  Fisk, 
H.  G.  Brown, 

f.  m.  dudeney, 

Exporters' 
Encyclopaedia, 


Practical   Exporting,    (3rd  ed.),   New 
York,  1919. 

Principles   of   Foreign   Trade,   New 
York,  1 9 19. 

International  Commercial  Policies, 
New  York,  191 7. 

Principles   of   Commerce,   New  York, 
1917. 

Exporter's  Handbook,  London,  1916. 
Annual  Handbook,  19 19- 1920. 


F.  W.  Taussig, 

Palgrave, 
Jevons, 


Economics. 

Principles  of  Economics,   New  York, 
1919. 

Dictionary  of  Political  Economy,  Lon- 
don, 1906. 

The  Principles  of  Economics. 


Insurance  and  Transportation. 

Leroy  R.  Johnson,         Ocean  and  Inland  Water  Transporta- 
tion, New  York,  1918. 

B.  Olney  Hough,  Ocean  Traffic  and  Trade,  Chicago,  '18. 


Foreign  Exchange. 
H.  K.  Brooks,  Foreign  Exchange,  New  York. 

Margraff,  Foreign  Exchange,  New  York,  1912. 

Franklin  Escher,  Foreign  Exchange  Explained,  New 

York,   1917. 


BIBLIOGRAPHY 


539 


Vedder, 
Hensi  Hauser, 


Methods. 

American  Methods  in  Foreign  Trade, 
New  York,  1919. 

Germany's  Commercial  Grip  on  the 
World,  (translated  from  French), 
New  York,  1918. 


Bank  Publications. 


Federal  Reserve  Board,  Annual  Reports. 

Federal  Reserve  Bank    Annual  Reports. 
of  New  York, 

Irving  National  Bank  Trading  with  Latin-America. 

of  New  York,  Trading  with  the  Far  East,  (and  sev- 

eral other  valuable  works,  a  list  of 
which  may  be  obtained  on  application 
to  the  Bank). 


National  City  Bank 
of  New  York, 


Guaranty  Trust  Co. 
of  New  York, 


A  Handbook  of  Finance  and  Trade 
with  South  America,  New  York,  1919, 
(and  numerous  other  valuable  books, 
pamphlets  and  periodical  publications, 
a  list  of  which  may  be  obtained  on  ap- 
plication to  the  Bank). 

Numerous  valuable  pamphlets. 


National  Bank  of  Com- 
merce of  New  York,     Numerous  pamphlets  of  value. 


Acceptance  Council, 
New  York, 


Valuable  pamphlets  on  bank  and  trade 
acceptances. 


Document  Technique. 

National  Association 

of  Manufacturers,        Export  Order,  New  York,  iglg. 


540 


BIBLIOGRAPHY 


Government  Publications. 

Bureau  of  Foreign  and  Domestic  Commerce. 

Dr.  G   E.  Snider,  Selling  in  Foreign  Markets,  Washing- 

ton, 1918. 

Archibald  J.  Wolfe,      Foreign  Credits,  Washington,  191 3. 
(A  list  of  the  Bureau's  publications  may  be  obtained  on  applica- 
tion to  the  Bureau,  Washington,  or  to  the  nearest  district  office.) 


International  Law. 


F.  Meili,  International    Civil    and  Commercial 

Law,    (translated    by    A.    K.    Kuhn), 
New  York,   1905. 

Archibald  J.  Wolfe,  Commercial  Laws  of  the  United  King- 
dom, Germany  and  France,  Washing- 
ton,  1915. 

Commercial    Laws    of    Switzerland, 
Washington,   191 5. 


Lippincott's, 


National  Foreign 
Trade  Council, 


Gazetteers. 
New  Gazetteer,  New  York. 

Association  Literature. 

Annual  Convention  Reports,  1915-19. 

New  York. 

(Containing  numerous  able  addresses) 


INDEX 


Acceptance : 

Credit   243 

Market  created  in  America  390 
Documents,  three  modes  of  244 
Policy   of   Federal    Reserve 

Board    432 

Acceptances: 
See  also  Bank  Acceptances. 

Domestic    429 

Exportation    428 

F.  I.  Kent   on 438 

Importation    427 

Under  Federal  Reserve  Act  384 

With  warehouse   security 430 

British    practice    344 

German  practice  321 

Modern  American  practice..  425 

Accepting  banks  447 

Accounts: 

Collection  of  overdue 490 

Current    241 

Adjustm't  of  disputes...248,490,493 

Advances   on   drafts 310,344 

Advertising  abroad   523 

Africa,  advertising  in 534 

Agent,  commission  60 

Agent,  selling    61 

Agents,  classified  75 

Agricultural  enterprises  over- 
seas as  exporters 122 

Algeria,  advertising  in 534 

Allowance,    draft    or   over- 
weight     221 

American     banking     practice, 

prior  to  1914  369 

American    banks,    branches 

abroad    453 

American     discount     market, 

J.  C.  Rovensky  on 444 

American   Exporter   529 

American   Exporters  and  Im- 
porters Ass'n   513 

American  Express  Company...    53 
American  manufacturers'  dis- 
abilities  in   financing   for- 
eign    shipments    prior    to 
1914   375,376 


American  Manufacturers'  Ex- 
port  Ass'n    30,52,93,511 

Ann  .lment    of    contracts 250 

Appointing   agents   abroad 458 

Arbitration  of  disputes 248,493 

Argentina: 

Advertising  in  535 

Company  laws  of 459 

Associated   Advertising   Clubs 

of  the  World 535 

Auctioneers   63 

Auctions    156,162 

Australia,  advertising  in 534 

Austria : 

Advertising  in  532 

Company  laws  of 460 

Authority  to  negotiate  drafts  414 

Bank,  central  rediscounting....  448 
Bank  acceptances: 
See  also  Acceptances. 
And  the   discount  market....  438 
Modern  American  practice..  425 

Specimens   431,432 

Banks : 

American,  before  1914 367 

American,     branching     out 

abroad   404,394 

American,  choice  of  connec- 
tions with   408 

American,   opening  account 

with  for  foreign  trade 409 

American,   since    1914 378 

Foreign,  branches   of  in  New 

York    401 

German    325 

In   Great   Britain 336 

Internat'l   connections  of,  as 
pre-requisite     to     foreign 

trade   expansion   31 

See  also  Contents,  Chapters 

xrv— xvii. 

Bargains  in   bulk 178 

Bazaars  \\2 

Belgium : 

Advertising  in  5,'{2 

Company  laws  of 461 


542 


INDEX 


Bibliography    537 

Bills    of    exchange 372 

Bolivia,  company  laws  of 462 

Bordeaux  Fair  136 

Brazil: 

Advertising  in  357 

Company  laws  of 463 

British  Export: 

Banks    and     financing   for- 
eign  shipments   345 

Credit  methods  summarized  347 
Methods  of   financing  ship- 
ments      334 

Brokers:    (see  also  Import 

Trade)    63 

Buffalo   Chamber  of  Com'rce, 

foreign   bureau   520 

Bulgaria : 

Advertising  in  532 

Company  laws  of 465 

Bureau  of  Foreign  and  Do- 
mestic Commerce,  activi- 
ties    497,520 

Call  money  market  450 

Cancellation   of   contracts 250 

Catalogs   and   circularization..  530 
Chamber  of  Commerce  of 

U.   S.    A 30,52,493,508 

Chambers   of   Commerce  with 

foreign  trade  bureaus,  519-522 
Chicago   Association   of   Com- 
merce      521 

Chile: 

Advertising  in  535 

Company  laws  of 465 

China: 

Advertising  in  534 

Company  laws  of 465 

Cif  contracts   267 

Cif  quotations   233-236 

Cincinnati   Chamber   of   Com- 
merce, foreign  trade  bureau  519 
Circularization     and     corres- 
pondence     99,530 

Commerce,   see    also    Interna- 
tional   Commerce,    Export 
Trade,  Import  Trade. 
Commerce: 

Active  IS 

Classification   of   15 

Direct,  meaning  of 17 

Indirect,   meaning   of 17 

International,  and   econom- 
ics         19 

International,      scheme      of 

study    20 

Intermediate    17 

Meaning  of  13 

Overland   18 


Oversea    18 

Passive  18 

Reports   498 

U.  S.  Department  of,  trade 

promotion  by  497 

Commercial: 

Attaches    52,498 

Geography    20 

Laws  as  factor  in  commerce     50 
Laws  of  principal  countries  459 

Travelers,  licenses  for 489 

Usage    as    factor    in    com- 
merce        50 

Commission   agents   60 

Commission    merchants 60,69 

Competitivenes    32-33 

Consignee    60 

Consignment    61 

Consignment  business: 

Features  of  110 

Prevalence  in  import  trade  143 

Consignor    60 

Consumer,  as  factor  in  com- 
merce         13 

Consumers,     oversea    as    cus- 
tomers      101 

Contract,  law  of  the  place  of  248 
Contracts,  see  also  Sales  Con- 
tracts. 
Arrival,  in  oversea  produce 

.'. 267-272-273 

Cif   267 

Import    trade,     in     oversea 

produce    266 

Placed    by    exporters    with 

manufacturers   276 

Specimen  of  order  form  in 

export  trade   279 

Corporations,  rights  of,  under 

international  law  454 

Correspondence  and  circular- 
ization         99 

Collection   of  overdue  acc'nts  490 
Council  on  Foreign  Belations  513 
Credit: 
See  also  Foreign  Credits. 

Acceptance    243 

Confirmed    238,243 

Confirmed,    modern    Ameri- 
can practice  414 

Information    355,356 

Instruments,   see   Drafts 

Instruments    in    modern 

American  practice   411 

Instruments,    necessity   of 

standardization   446 

Methods,    British     summar- 
ized     347 

Methods,    German    summar- 
ized     328 


INDEX 


543 


Eeports,  value  of  360 

Secured    242 

Terms  (see  also  British,  Ger- 
man methods,  and  mod- 
ern American  practice)....  240 

Credits: 

Irrevocable   423 

Revocable    424 

Revolving    415 

Specimens   of   421-424 

Customs  duties  42,43 

Customs  tariffs,  as  factors  in 
commerce   41 

Czecho-Slovakia: 

Advertising  in  532 

Company  laws  of 466 

Debts,  recovery  of  490 

Del  credere   61,71 

Delivery    212 

Demand   and  purchasing  power    45 
Denmark: 

Advertising  in  532 

Company  laws  of 466 

Department   of  Commerce: 
See  also  Bureau  of  Foreign 
and   Domestic    Commerce. 
Foreign  trade  promotion  by  497 
Department  of  State,  U.  S.: 
See  also  Foreign  Trade  Ad- 
viser. 
Foreign  Trade  Adviser's  Of- 
fice      500 

Foreign  trade  promotion  by  500 
Direct   exporting   by   German 

manufacturers   298 

Discount  market: 

American,      suggested      im- 
provements      450 

And  bank  acceptances 438 

Component   factors   of 446 

Functions   of   444 

Discounts: 

And  rebates  228 

Cash  229 

Disputes : 

Adjustment  of  490 

Contract  clauses  relating  to 

adjustment  of  247 

Documentary    drafts,    British 

practice    337 

Documents: 

Against  acceptance  243 

Against    payment 227,245 

Dollar   exchange   drafts 430 

Draft  allowance  (overweight)  221 
Drafts: 

See  also  Credit  Instruments. 

Authority  to  negotiate 414 

British  practice   337 


Clean,  discounted  414 

Demand    412 

Discount  of,  in  America  be- 
fore  1914   373 

For  dollar  exchange 430 

German  practice  300 

Presented   for   collection 412 

Sight     244,412 

Specimens   of    410,  111  1 

Dun,  R.   G.   &   Co 357 

Dun's    International   Review...  520 
Dutch  Auctions  163 

Egypt,  advertising  in 534 

El  Comercio  5:30 

Europeans  as  exporters  from 

oversea  countries  125 

Examination     of     shipments 

177,188,192,193,270 

Exchange  fluctuations  224 

Exchanges   168 

Export: 

Activity,   criterion   of 24 

Advertising    523 

Agents,   German   297 

Agents,     Wyman's     classifi- 
cation         75 

American  Industries  529 

Bounties  44 

Centers  in   exporting  coun- 
tries       89 

Centers    overseas    131 

Commission   merchants,   see 
Commission  Merchants. 

Meaning  of  15 

Merchants   69 

Merchants,  German   296 

Merchants,  qualifications  of    25 

Order   form    279 

Periodicals,   American 527 

Publicity   523 

Trade   (weekly)   539 

Trade   connections   between 
exporting   and    importing 

country   9^ 

Trade    organization    in    ex- 
porting  country   65 

Trade    organization    in    im- 
porting  country   100 

Exporters: 

As  buying  agents  70 

As  part  of  organization   of 

export  trade  65 

As  selling  agents  ...". 

General,   activity   of 68 

Overseas,   shipping  to   U.  s" 
and    Europe    J23 

,,  Types  of JZZ!  66 

Exporters'   Encyclopaedia   516 

Exporters'  Review  530 


544 


INDEX 


Exporting: 

Direct  66 

Direct,  advantages  and  dis- 
advantages of  83 

Indirect    66 

Indirect,     advantages     and 
disadvantages  of  83 

Factors,  basic,  of  interna- 
tional commerce  23 

Farrell,  James  A 508 

F.  a.   s.   quotations 232,230 

Federal  incorporation  of  bank- 
ing associations  for  for- 
eign trade  399 

Federal  Reserve  Act 379 

Federal  Reserve  Banks,  redis- 

counting   with    434 

Federal    Reserve    Board    and 

foreign   banks   392 

Federal  Reserve  System 378,386 

Filsinger,  Ernst  B 22 

Financing  foreign  shipments: 
American     practice     before 

1914   349 

American  practice  since  1914  402 

British  methods  334,337 

German    methods    2S7.300 

See  Contents,  Chapters  XTV- 
XVII. 
Finland : 

Advertising  in  533 

Company  laws  of 467 

First  National  Bank  of  Boston  398 
Fixed  standards   of   quality....  183 

Floating  conditions  267 

Fluctuation  clause  216 

F.  o.  b.   quotations 233,234 

Foreign  advertising  523 

Foreign  branches  of  Amer- 
ican firms  453 

Foreign  catalogs  530 

Foreign    company    laws 459 

Foreign  credit  clearing  house  366 
Foreign     Credit     Interchange 

Bureau   357,369 

Foreign     credit     problem     in 

America  prior  to   1914 349 

Foreign     credit     problem     in 

America  since   1914 378 

Foreign  Credits;  by  Archibald 
J.  Wolfe  349 

Foreign  credits: 

General  statement  of  prob- 
lem     283 

Pre-war  attitude  to,  in  Amer- 
ica      353 

Sub-division   of  subject 280 

Foreign  merchants,  rights  of..  454 


Foreign  newspapers  and  trade 
journals   533 

Foreign  publicity  523 

Foreign  Trade  Adviser's  Of- 
fice, State  Department 52,500 

Foreign  Trade  Club  of  San 
Francisco    522.. 

Foreign   trade   promotion: 

By  local  organizations 515 

By   nat'l   organizations.. ..506-515 
By  official  bodies 495 

France : 

Advertising  in  53'! 

Company  laws  of  4(57 

Free  ports  45 

German   banking   293,323-328 

German  credit  methods: 

Acceptance   credit    321 

Acceptance   market   317 

Account   current   credit 321 

Bank  co-operation   323 

Del  credere   32  i 

Discounts    307 

Documentary  drafts   303 

Merits  and   defects 329 

Use   of   sterling  currency....  305 

German  export  activities^  his- 
toric   analysis    290 

German   export  agents 297 

German   export   merchants 296 

German  manufacturers  and 
direct   exporting  298 

German  methods  of  financing 
foreign    shipments    287-300 

Governmental  influences  as 
factor  in  commerce 40 

Great  Britain: 

Advertising  in  533 

Company    laws    of 478 

Guaranty  Trust  Company.. ..53,404 

Haiti,  company  laws  of 479 

Holland: 

Advertising  in  533 

Company  laws  of 482 

Hough,  B.  Olney 32,529 

Hungary,  company  laws  of....  480 

Illinois  Manufacturers'  Asso- 
ciation, foreign  trade  ac- 
tivities      521 

Import  trade: 

Activity  of  importers 138 

Buying   trips   135 

Centers  in  industrial  coun- 
tries     145 

Centers  overseas  116 

Combined  with  export 126 

Commercial   connections  ....  134 


INDEX 


545 


Consignment    business 14.1 

Exporters   overseas  shipping 

to   industrial   countries 123 

Meaning    of    15 

Organization   of    120 

Oversea  producers  121 

Prohibitions    41 

Purchasing  offices  ■ 135 

Sales  offices   137 

Selling  agents   13G 

Selling   trips    135 

(See  also  Chapters  VII  and 
VIII). 

Importers: 

General    101 

Overseas,   classified   100 

Overseas,  advantages  and 
disadvantages  of  dealing 
with    114 

Incorporating  abroad   458 

India,   advertising   in 535 

Indents: 

Far    Eastern    264 

Far  Eastern,  specimen  of....  266 

Indian   259 

Indian,  specimen   of 262 

Meaning  of  250 

Inspection  of  shipments 177 

Insurance   38,275 

International  Commerce,  see 
also   Commerce. 

International  Commerce: 

Basic  factors  23 

Organization   of   64 

Public  promotion  of 32 

International  law,  rights  of 
alien   merchants    454 

Invoices   173 

Post-dating  of  228 

Irving  National  Bank 53,358 

Italy: 

Advertising  in  533 

Company  laws  of 480 

Japan : 

Advertising  in  534 

Company  laws  of 481 

Jobbers,  oversea  as  direct  cus- 
tomers      103 

Jugo-Slavia : 

Advertising  in  533 

Company  laws  of 481 

Kent,  F.  I.,  on  Acceptances....  438 
Knox,  Wm.  H.,  on  Exporters    87 

Latin-American  countries,  ad- 
vertising  in    535 

Laws,  foreign  trading  and 
company    459-489 


Abyssinia   459 

Argentina    459 

Austria  460 

Belgium   4<>1 

Bolivia   462 

Brazil   163 

Bulgaria    165 

Chile    165 

China    465 

Colombia    466 

Cuba   466 

Czecho-Slovakia     166 

Denmark    466 

Ecuador    466 

Finland    467 

France    467 

Germany    475 

Great   Britain   and   depend- 
encies      478 

Greece    479 

Guatemala    480 

Haiti   479 

Holland    482 

Hungary    480 

Italy    480 

Japan    481 

Jugoslavia  481 

Mexico    481 

Netherlands    482 

Norway    482 

Peru    483 

Portugal   483 

Boumania    483 

Russia    484 

Serbia    484 

Spain   484 

Sweden    484 

Switzerland    484 

Uruguay   488 

Venezuela   489 

Letters  of  credit,  speci- 
mens     422-424 

Licenses  for  commercial  tra- 
velers      480 

London,  predominance  in  in- 
ternational settlements  be- 
fore  the   war 334 

Lyons  Sample  Fair  ....30,155 

Manufacturers  and  merchants, 
points  in  dispute   between     87 

Markets  and  fairs 152 

Measurements,  arrival,  unload- 
ing, shipping  218 

Merchant   shippers  in  England     66 

Merchants  Association  of  New 
York,     foreign     trade     ac- 

„  *****    521 

Merchants : 

As  factors   in   commerce 13 


546 


INDEX 


As  middlemen  o3 

Commission   60 

Export,  qualifications  of......     25 

International,   as   factor   in 
development     of     export 

trade  23 

Itinerant    58 

Eetail   58 

Trading  for  own  account....     58 

Wholesale    53 

(See  also  under  Organization 
of  Export  and  of  Import 
Trade). 

Mexico,  company  laws  of 481 

Middlemen     between    oversea 

producers  and  exporters....  139 
Mining     enterprises    overseas 

TOO 

as  exporters  J^ 

Missions,     religious,     as     eco- 
nomic  factors    102 

Morocco,  advertising  in 534 

National  Association  of  Cred- 
it Men   357,366 

(See  also  Foreign  Credit  In- 
terchange Bureau). 
National    Ass'n    of    Manufac- 
turers     30,52,93,510,537 

Nat'l  Bank  of  Commerce....358,404 
National  City  Bank..53,398,358,404 
National   Foreign  Trade  Coun- 
cil     30,52,507 

Native  distributors: 

Overseas   1°6 

Wholesalers    113 

Netherlands : 

Advertising  in  533 

Company  laws  482 

Norway: 

Advertising   in   533 

Company  laws  482 

New  York   purchasing   center 

of  foreign   exchange 375 

New  Zealand,  advertising  in..  534 

Offices : 

Firm    172 

Free    172 

Open  account  241 

(See   also   Foreign   Credits, 
Credit,  etc) 
Organization  of  export  trade     65 
(See  also  Contents  .Chapters 
V  and  VI). 
Organization  of  import  trade. 
I       (See  also  Chapters  VII  and 
VIII.) 
Organization  of  international 

commerce   64 

Overdue    accounts,    collection 
of   490 


Oversea  importers,  activity  of  107 

(See  also  Chapter  VI). 
Oversea  producers  as  export- 
ers      121 

Oversea  products: 

Fluctuation  in  price  of 127 

Import  trade  in   120 

(See  also  Chapters  VII  and 
VIII). 
Oversea    wholesalers,    jobbers 

and   retailers   103 

(See  also  Chapter  VI). 

Packing,     cost     expressed     in 

quoting   195,199,232 

Packing,  methods  of 195 

Payment: 

After   shipment   *38,239 

Against  documents  239 

Place  of  237 

Time  of  237 

Performance : 

Contract,  law  of  the  place  of    248 
Place  of,  see  Sales  Contract. 
Time  of,  see  Sales  Contract. 
Peru: 

Advertising  in   535 

Company  laws  in 483 

Philadelphia    Commercial 

Museum    52,357,512 

Pittsburgh,  Chamber  of  Com- 
merce, foreign  trade  ac- 
tivities      520 

Poland,  advertising  in 533 

Portugal : 

Advertising  in  533 

Company  laws  of 483 

Powers  of  attorney 457,487 

Preferential  treatment  in  cus- 
toms tariffs  43 

Price    and    the    technique    of 

price  calculation  214 

Price: 

Basic   214 

Basis  and  allowances  for 
quality  and  quantity  dif- 
ferences     217 

Calculation,  time  basis  of....  226 

Denomination   222,223,224 

Meaning  of  214 

Unit   214,215 

Prices,   cash    22^ 

Pricing  216 

Producers: 

As  factors  in  commerce 13 

And  consumers   56 

Production,    efficiency,    quan- 
titative and  qualitative 32 

Public   sales,   organization   of  152 
Publicity   abroad    523 


INDEX 


547 


Purchasing  eagerness   19 

Purchasing  power  as  factor  in 
commerce    45 

Quotation: 

Cash    basis    22 

Clauses    234,235,236 

Meaning  of  216 

Time   basis   228 

Sundry    elements    of 231 

Rebate,  meaning  of 230 

Rediscount  with  Federal  Re- 
serve   Banks    434 

Rediscounting,     with     central 

bank    448 

Re-export   17 

Remittances    246 

Remittances  of   merchandise..  247 
Retailers,     overseas,     as     cus- 
tomers     103 

Rochester  Chamber  of  Com- 
merce, activities  in  for- 
eign   trade    519 

Roumania,  company  laws  of....  483 
Rovensky,   J.  C,   on  the  Amer- 
ican Discount  Market 444 

Russia,  company  laws  of 484 

Sales  branches   94,97,453 

Sales  Contract : 

(See  also  Contents,  Chapters 

X— XIII). 
Adjustment   of   disputes 

clauses    247 

Annulment   of   250 

Arrival  contracts   207 

As   central   fact   in   foreign 

trade   instruction    19 

Cancellation  of  250 

Certificates   of   quality 189 

Commercial  designations  in  182 

Delivery  212 

Delivery  contracts  207 

Default    208 

Description  of  quality ISO 

Failure  to  deliver 209 

Form  of  171 

Future  specifications  185 

Invoice    173 

Obligations   relating  to   na- 
ture of  goods 177 

Obligations  relating  to  quan- 
tity      190 

•  Obligations  relating  to  pack- 
ing     194 

Obligations   relating  to  style  199 

Place  of  delivery...., 187 

Place  of  examination 186 

Place   of  performance 186,210 


Purchases  at  random 185 

Purchases  with  definite  qua- 
lity basis  185 

Risk  of  loss,  shortage,  dete- 
rioration      213 

Samples    177 

Special   designations   l.Hl 

Time  of  performance 201 

Samples: 

Examination  of  177 

Reference    188 

San  Francisco  Chamber  of 
Commerce,  activities  in  for- 
eign trade  promotion 51!» 

San  Francisco  Foreign  Trade 

Club   522 

Savay,  Norbert   22 

Sealed  tenders  165 

Seattle  Chamber  of  Commerce, 
activities  in  foreign  trade 

promotion    521 

Selling  agents   01,95,96 

Selling  trips  in  promoting  ex- 
port       94 

Serbia,  company  laws  of 484 

Spain : 

Advertising  in  533 

Company  laws  of 484 

State  Department,  see  Foreign 

Trade  Adviser's  Office. 
Standardized     credit     instru- 
ments      446 

Support  accounts  98 

Sweden: 

Advertising  in  534 

Company  laws  of 484 

Switzerland : 

Advertising  in  534 

Company  laws  of 484 

Tanners'  Council: 

Activities  of  514 

Arbitration  of  disputes 49:; 

Tare   219,220 

Terms,   cash   237 

(Sec  also  Credit  Terms). 

Test  pieces  17s 

Tolerance    217 

Transportation : 

Cost  expressed  in  quotation  232 

Elements  of  37 

Trader  as  factor  in  commerce     13 

(See  also  Merchants). 
Trade  promotion  as  factor  in 

commerce   51 

Traffic    conditions,    as    factor 

in    commerce    33 

Traveling  salesmen   94 

Traveling    licenses    for 94 

Tunis,   advertising   in 5:i4 


548 


INDEX 


Uruguay,  company  laws  of....  488 
Venezuela,  company  laws  of..  489 

War  Trade  Board 44,505 

Weight : 

Arrival   218 

Legal    219 

Net    219 

Shipping   218 

Unloading  218 


Wholesalers,   oversea   as   cus- 
tomers      103 

(See   also    under   Organiza- 
tion.) 
Wolfe,  Archibald  J.: 

"Foreign   Credits"   289 

"Commercial  Laws  of  Eng- 
land,     Germany      and 

France"  467 

World's   Markets   93,530 

Wyman,  Walter  F.,  on  Export 
Agents    75 


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